1A. Risk Factors.
Our business is subject to various risks and uncertainties,
including those described below, that we believe apply to our business and the industry in which we operate. You should carefully
consider these risks, as well as the other information in our Annual Report on Form 10-K, the Current Report on Form 8-K/A filed
with the SEC on May 7, 2020 and this Quarterly Report on Form 10-Q, including our financial statements and the related notes
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of
any of the events or developments described below could have a material adverse effect on our business, results of operations,
financial condition, prospects and stock price. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial may also impair our business.
Risks Related to the Merger
We may fail to successfully integrate
with Foamix which may have a material adverse effect on our results of operations.
Menlo and Foamix have
operated independently, and their businesses may not be integrated successfully. It is possible that the ongoing integration process
could result in the loss of key employees, the disruption of ongoing business of the combined company or in unexpected integration
issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally
anticipated. Specifically, issues that must be addressed in integrating the operations of Menlo and Foamix in order to realize
the anticipated benefits of the Merger so the combined business performs as expected include, among others:
|
·
|
combining the companies’ separate operational, financial, reporting and corporate functions;
|
|
·
|
integrating the companies’ technologies, products, product candidates and services;
|
|
·
|
complying with regulatory requirements that apply to the companies’ businesses, products
and product candidates;
|
|
·
|
identifying and eliminating redundant and underperforming operations and assets;
|
|
·
|
harmonizing the companies’ operating practices, employee development, compensation and benefit
programs, internal controls and other policies, procedures and processes;
|
|
·
|
addressing possible differences in corporate cultures and management philosophies;
|
|
·
|
maintaining employee morale and retaining key management and other employees;
|
|
·
|
attracting and recruiting prospective employees;
|
|
·
|
consolidating the companies’ corporate, administrative and information technology infrastructure;
|
|
·
|
managing the movement of certain businesses and positions to different locations;
|
|
·
|
maintaining existing agreements with third-parties and avoiding delays in entering into new agreements
with potential business partners;
|
|
·
|
coordinating geographically dispersed organizations;
|
|
·
|
consolidating facilities; and
|
|
·
|
effecting potential actions that may be required in connection with obtaining regulatory approvals.
|
In addition, at times,
the attention of certain members of each company’s management and each company’s resources may be focused on the integration
of the two businesses and diverted from day-to-day business operations, which may disrupt the business of the combined company.
Menlo and Foamix have incurred, and
the combined company will incur, substantial direct and indirect costs as a result of the Merger.
Menlo and Foamix have incurred, and the
combined company will incur, substantial expenses in connection with and as a result of completing the Merger, including financial
advisory, legal, accounting, consulting and other advisory fees and expenses, regulatory filings and filing and printing fees.
In addition, over a period of time following the closing, we expect to incur substantial expenses in connection with integrating
and coordinating the businesses, operations, policies and procedures of Menlo and Foamix and employee-benefit and related expenses.
While Menlo and Foamix have assumed that a certain level of transaction expenses will be incurred, factors beyond Menlo’s
and Foamix’s control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred,
by their nature, are difficult to estimate accurately. These expenses will exceed the costs historically borne by Menlo and Foamix.
These costs could adversely affect the financial condition and results of operations of the combined company and the elimination
of certain duplicative costs, and the realization of other efficiencies related to the integration of the two businesses, may not
offset the incremental transaction-related costs over time. Thus, any net benefit may not be achieved in the near term, the long
term or at all.
Risks Related to Our Business and Industry
We are largely dependent on the success
of AMZEEQ for the treatment of acne and our lead product candidate FMX103 for the treatment of rosacea.
To date, we have invested
significant efforts and financial resources in the research and development of (i) AMZEEQ for the treatment of inflammatory lesions
of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older, which received approval from the FDA on October
18, 2019 and became available for prescribing on January 13, 2020 and (ii) FMX103 for the treatment of papulopustular rosacea in
adults, for which the FDA has set a PDUFA action date of June 2, 2020. Our success will depend largely on our ability to (i) continue
to successfully commercialize AMZEEQ, (ii) obtain regulatory approval for and successfully commercialize FMX103, (iii) advance
the development of our pipeline candidates and (iv) comply with the regulatory requirements that apply to these activities. If
we fail to successfully commercialize AMZEEQ, obtain requisite regulatory approval within the expected time frame, or at all, for
FMX103 or we do not successfully develop and commercialize our pipeline candidates, our financial position and results of operations
would be adversely affected.
Even though AMZEEQ has received FDA
approval, and even if FMX103 or our other product candidates receive regulatory approval, they may fail to achieve the broad degree
of physician adoption and use and market acceptance necessary for commercial success.
Even though we have
obtained FDA approval for AMZEEQ, and even if we obtain FDA approval for FMX103 or any of our other product candidates, the commercial
success of such products will depend significantly on their broad adoption and use by dermatologists, pediatricians and other physicians
for approved indications, including AMZEEQ for the treatment of moderate-to-severe acne in patients 9 years of age and older and
FMX103 for the treatment of moderate-to-severe rosacea in adults, as well as any other therapeutic indications that we may seek
to pursue.
Moreover, if the treatment
of acne with AMZEEQ or rosacea with FMX103 is deemed to be an elective procedure, the cost of which is borne by the patient, it
will not be reimbursable through government or private health insurance.
The degree and rate
of physician and patient adoption of AMZEEQ, and, if approved, FMX103 and any of our other product candidates, will depend on a
number of factors, including:
|
·
|
the clinical indications for which the product is approved;
|
|
·
|
the safety and efficacy of our product as compared to existing therapies for those indications;
|
|
·
|
the prevalence and severity of adverse side effects;
|
|
·
|
patient satisfaction with the results and administration of our product and overall treatment experience,
including relative convenience, ease of use and avoidance of, or reduction in, adverse side effects;
|
|
·
|
patient demand for the treatment of moderate-to-severe acne and rosacea or other indications;
|
|
·
|
the effectiveness of our sales and marketing efforts, especially the success of any targeted marketing
efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing efforts we
may initiate.
|
|
·
|
overcoming biases of physicians and patients towards topical treatments for moderate-to-severe
acne, rosacea or other indications and their willingness to adopt new therapies for these indications;
|
|
·
|
the cost of treatment in relation to alternative treatments, the extent to which these costs are
covered and adequately reimbursed by third party payors, and patients’ willingness to pay for our products; and
|
|
·
|
proper training and administration of our products by dermatologists, pediatricians and medical
staff.
|
We have not obtained regulatory approvals
to market FMX103 or our other pipeline product candidates, and we may be delayed in obtaining or fail to obtain such regulatory
approvals and to commercialize these product candidates.
The process of developing,
obtaining regulatory approval for and commercializing FMX103 and our other product candidates is long, complex, costly and uncertain,
and delays or failure can occur at any stage. Furthermore, the research, testing, manufacturing, labeling, marketing, sale and
distribution of drugs are subject to extensive and rigorous regulation by the FDA. We are not permitted to market any of our product
candidates in the United States until we receive approval of the applicable NDA from the FDA. To gain approval of an NDA or other
equivalent regulatory approval, we must provide the FDA with clinical data that demonstrates the continued safety and efficacy
of the product for the intended indication.
While we have received
FDA approval to market AMZEEQ, we have not received formal regulatory clearance to market FMX103 from the FDA. Our other product
candidates are at earlier stages of development and therefore subject to similar or even greater uncertainty and risk than FMX103.
Although we received
positive Phase III clinical trial results for FMX103, the results of those clinical trials may be unsatisfactory to the FDA even
if we believe those clinical trials were successful. The FDA may require that we conduct additional clinical, nonclinical, manufacturing,
validation or drug product quality studies and submit that data before considering or reconsidering any NDA we may submit. Depending
on the extent of these additional studies, approval of any applications that we submit may be significantly delayed or may require
us to expend more resources than we have available. It is also possible that additional studies we conduct may not be considered
sufficient by the FDA to provide regulatory approval.
If any of these outcomes
occur, we would not receive approval for FMX103 or our other product candidates and may need to discontinue the development of
such product candidates.
Our ability to finance our operations
and generate revenues depends on the commercial success of AMZEEQ and on the clinical and commercial success of FMX103 and our
other product candidates, and failure to achieve such success will negatively impact our business.
Although we received
FDA approval of AMZEEQ, we expect to continue to incur losses for the near future, which will delay our profitability. Moreover,
it is possible that even if we succeed in developing and commercializing one or more of our other product candidates, we may never
become profitable. Our near-term prospects, including our ability to finance our operations and generate revenues, depend on the
successful commercialization of AMZEEQ and on the successful regulatory approval and commercialization of FMX103. The success of
AMZEEQ, FMX103 and our other product candidates depends on a number of factors, many of which are beyond our control, including:
|
·
|
the effectiveness of our marketing, sales and distribution strategy and operations;
|
|
·
|
our ability to effectively run our marketing, sales and distribution strategy during the global
COVID-19 pandemic, including our ability to conduct our existing operations in areas that are “closed” for business
pursuant to governmental orders;
|
|
·
|
our ability to maintain, independently or via third parties, a commercially viable manufacturing
process that is compliant with cGMP;
|
|
·
|
our success in educating health care providers and patients about the benefits, administration
and use of AMZEEQ and, if approved, FMX103 and our other product candidates, including to the extent such efforts are hampered
by our inability to conduct traditional face-to-face interactions with healthcare providers during the COVID-19 pandemic;
|
|
·
|
the FDA’s acceptance of our parameters for regulatory approval relating to FMX103 and our
other product candidates, including our proposed indications, primary endpoint assessments, primary endpoint measurements and regulatory
pathways;
|
|
·
|
the FDA’s acceptance of the number, design, size, conduct and implementation of our clinical
trials for our clinical-stage product candidates, our trial protocols and the interpretation of data from preclinical studies or
clinical trials;
|
|
·
|
the FDA’s acceptance of the sufficiency of the data we collected from our preclinical studies
and clinical trials to support the submission of an NDA without requiring additional preclinical or clinical trials;
|
|
·
|
the FDA’s willingness to schedule an advisory committee meeting in a timely manner to evaluate
and decide on the approval of an NDA;
|
|
·
|
the recommendation of the FDA advisory committee to approve our application without limiting the
approved labeling, specifications, distribution or use of the products, or imposing other restrictions;
|
|
·
|
the FDA’s satisfaction with the NDA submission for FMX103 or our other product candidates;
|
|
·
|
the prevalence and severity of adverse events associated with AMZEEQ, FMX103 and our other product
candidates;
|
|
·
|
the timely and satisfactory performance by third party contractors of their obligations in relation
to our clinical trials and our manufacturing and supply of AMZEEQ and our product candidates;
|
|
·
|
our ability to raise additional capital on acceptable terms in order to achieve our goals;
|
|
·
|
the availability, perceived advantages, relative cost, safety and efficacy of alternative and competing
treatments;
|
|
·
|
our ability to take advantage of the 505(b)(2) regulatory pathway and obtain regulatory marketing
exclusivity for our products under the Hatch-Waxman Act;
|
|
·
|
our ability to create, pursue, obtain, protect and enforce our intellectual property rights with
respect to AMZEEQ, FMX103 or our other product candidates;
|
|
·
|
the prevalence and severity of signs and symptoms associated with AMZEEQ, FMX103 and our other
product candidates;
|
|
·
|
our ability to bring an action timely for patent infringement arising out of the filing of ANDAs
by generic companies seeking approval to market generic versions of our products before the expiry of our patents;
|
|
·
|
our ability to bring an action timely for patent infringement arising out of the filing of 505(b)(2)
applications by companies seeking approval to market products before expiry of our patents; and
|
|
·
|
our ability to avoid third party claims of patent infringement or intellectual property violations.
|
If we fail to achieve
these objectives or to overcome the challenges presented above, many of which are beyond our control, in a timely manner, we could
experience significant delays or an inability to successfully commercialize AMZEEQ or our product candidates. Accordingly, we may
not be able to generate sufficient revenues through the sale of AMZEEQ, FMX103 or our other product candidates to enable us to
continue our business.
We face risks related to health epidemics and other widespread
outbreaks of contagious disease, including the novel coronavirus, COVID-19, which have disrupted, and may continue to significantly
disrupt, our operations and impact our financial results.
In December 2019,
an outbreak of respiratory illness caused by a strain of novel coronavirus, COVID-19, began in China. As of April 2020, that outbreak
has led to numerous confirmed cases worldwide, including in the Unites States and other countries where we or our business partners
conduct operations. The outbreak and government measures taken in response have also had a significant impact, both direct and
indirect, on businesses and commerce, including our own operations. The future progression of the outbreak and its effects on our
business and operations are uncertain. Many patients have chosen not to visit or contact their healthcare providers which has limited
new patient access and conversion. In response to the outbreak, we have taken certain steps to safeguard our employees, healthcare
professionals and our other partners. For example, our sales force and marketing team have been removed from the field and have
adopted remote and virtual sales activities, including tele-detailing, web-based speaker programs and virtual product education
sessions, in order to meet patients’ needs. No assurance can be made that these sales tactics will be as effective as those
used prior to the outbreak of COVID-19. If the activities of our sales force continue to be disrupted or such tele-detailing and
virtual-based tactics are not accepted by healthcare professionals, we may generate less revenue than expected which would have
a material adverse effect on our financial results as well as hinder our ability to satisfy certain covenants contained in our
Credit Agreement.
We are currently unaware
of any material disruptions to the supply of AMZEEQ and any material impact on our primary suppliers. We believe we have a sufficient
amount of product in the trade and safety stock of our raw materials to support the current demand for AMZEEQ. While we are currently
unaware of any material disruptions to our supply, our primary suppliers or our anticipated timelines for clinical results and
other key milestones, we cannot guarantee that we will not experience such disruptions in the future as a result of the COVID-19
pandemic. If the outbreak of COVID-19 persists, we and our third-party contract manufacturers, contract research organizations
and clinical sites may experience disruptions in supply of our product and product candidates and/or procuring items that are essential
for our commercialization and research and development activities, including, for example, raw materials used in the manufacturing
of our products and product candidates, medical and laboratory supplies used in our clinical trials or preclinical studies, in
each case, for which there may be shortages because of ongoing efforts to address the outbreak. Any negative impact that the outbreak
has on the ability of our suppliers to provide materials for our product and product candidates or on retaining patients in our
clinical trials could disrupt our commercialization efforts and clinical trial activities, which could adversely affect our ability
to earn revenue, obtain regulatory approval for and to commercialize our product candidates, increase our operating expenses, and
have a material adverse effect on our financial results.
We will require substantial additional
financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could
force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.
We anticipate that
we will continue to expend substantial resources for the foreseeable future for the commercialization of AMZEEQ and for pre-commercialization
efforts related to FMX103. We also wish to continue the development of our existing product candidates, including the completion
of the Phase 2 clinical trials for FCD105. However, we may not have sufficient funds to carry out and complete all of these plans
and may need to raise additional funds for such purposes.
These expenditures
will include costs associated with research and development, conducting preclinical studies and clinical trials, and manufacturing
and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise.
Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to reliably
estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates.
We believe that our
cash and cash equivalents and investments, projected cash flows from revenues and the funds that we are entitled to receive
under our license agreement with Cutia, will provide sufficient resources for our current ongoing needs through at least the next
twelve months, though there may be need for additional financing activity as a result of the on-going COVID-19 pandemic and as
we continue to grow. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources
sooner than we currently expect. In addition, we have in the past revised our operating plan in consideration of prudent resource
prioritization and allocation management and our operating plan may change in the future as a result of many factors currently
unknown to us. We may therefore need to seek additional capital sooner than planned, through public or private equity or debt financings
or other sources, such as strategic collaborations or additional license arrangements. Such financings may result in dilution to
shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition,
we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient
funds for our current or future operating plans.
Our future capital
requirements depend on many factors, including:
|
·
|
the cost of commercialization activities for AMZEEQ, FMX103 or any of our other product candidates
approved for sale, including marketing, sales and distribution costs;
|
|
·
|
the degree and rate of market acceptance of AMZEEQ and any future approved products;
|
|
·
|
the emergence, approval, availability, perceived advantages, relative cost, relative safety and
relative efficacy of alternative and competing products or treatments;
|
|
·
|
the results of the clinical trials of our product candidates;
|
|
·
|
the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
|
|
·
|
the number and characteristics of any additional product candidates we develop or acquire;
|
|
·
|
the scope, progress, results and costs of researching and developing our product candidates, and
conducting preclinical and clinical trials;
|
|
·
|
the cost of manufacturing our product candidates and any products we successfully commercialize,
and maintaining our related facilities;
|
|
·
|
our ability to establish and maintain strategic collaborations, licensing or other arrangements
and the terms of and timing of such arrangements;
|
|
·
|
any product liability or other lawsuits related to our products;
|
|
·
|
the expenses needed to attract and retain skilled personnel;
|
|
·
|
the costs associated with being a public company;
|
|
·
|
the costs associated with evaluation of AMZEEQ or our product candidates;
|
|
·
|
the costs associated with evaluation of third party intellectual property;
|
|
·
|
the costs associated with obtaining and maintaining licenses;
|
|
·
|
the costs associated with creating, obtaining, protecting, defending and enforcing intellectual
property, such as costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, litigation
costs, including for patent infringement arising out of ANDA submissions by generic companies to manufacture and sell generic products
or arising out of 505(2)(b) submissions, and the outcome of such litigation; and
|
|
·
|
the timing, receipt and amount of sales of, or royalties on, approved products.
|
Additional capital
may not be available when we need it, on terms that are acceptable to us or at all. If adequate funds are not available to us on
a timely basis, we may be required to revise our operating plan in order to:
|
·
|
delay, limit, reduce or terminate our establishment of manufacturing, sales and marketing or distribution
capabilities or other activities that may be necessary to commercialize AMZEEQ, FMX103 or any of our other product candidates.
|
|
·
|
delay, limit, reduce or terminate our research and development activities; or
|
|
·
|
delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities
for our product candidates.
|
If we raise additional
capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements
with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams
or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public
or private equity offerings, the ownership interest of our existing shareholders will be diluted and the terms of any new equity
securities may have a preference over our ordinary shares. If we raise additional capital through debt financing, we may be subject
to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital
expenditures or specified financial ratios, any of which could restrict our ability to commercialize our product candidates or
operate as a business.
We have limited commercial sales
experience, which makes it difficult to evaluate our current business, predict our future prospects and forecast our financial
performance and growth.
Prior to the launch
of AMZEEQ on January 13, 2020, we had not generated any revenues from the sale of our drug products. Successful commercialization
of AMZEEQ or any future products is subject to many risks. Although many of our employees have commercialized products during their
employment at other organizations, we have not, as an organization, commercialized a product, and we may not be able to do so successfully
with AMZEEQ or any of our product candidates.
There are many factors
that could cause the commercialization of AMZEEQ or any future products to be unsuccessful, including a number of factors that
are outside our control. The commercial success of AMZEEQ depends on, among other things, the extent to which patients and physicians
accept and adopt AMZEEQ. For example, if the expected patient population is smaller than we estimate or if physicians are unwilling
to prescribe or patients are unwilling to use AMZEEQ, the commercial potential of AMZEEQ will be limited. In addition, we also
do not know how physicians, patients and payors will respond to the pricing of AMZEEQ. Thus, significant uncertainty remains regarding
the commercial potential of AMZEEQ. Moreover, our ability to effectively generate revenues from AMZEEQ will depend on our ability
to, among other things:
|
·
|
achieve and maintain compliance with regulatory and other requirements;
|
|
·
|
create market demand for and achieve market acceptance of AMZEEQ through our marketing and sales
activities and other arrangements established for the promotion of AMZEEQ;
|
|
·
|
compete with other acne treatments (either in the present or in the future);
|
|
·
|
train, deploy and support a qualified sales force;
|
|
·
|
maintain and obtain agreements with third-party manufacturers that can produce commercial supplies
of AMZEEQ at a scale sufficient to meet our anticipated demand and on terms acceptable to us and that can develop, validate and
maintain commercially viable manufacturing processes that are compliant with cGMP regulations, including our exclusive agreement
with ASM for the supply of the finished product of AMZEEQ and our third party agreements with the suppliers of AMZEEQ’s API;
|
|
·
|
implement and maintain agreements with wholesalers, distributors and group purchasing organizations
on commercially reasonable terms;
|
|
·
|
ensure that our entire supply chain efficiently and consistently delivers AMZEEQ to our customers;
|
|
·
|
receive coverage and adequate reimbursement for AMZEEQ from commercial health plans and governmental
health programs;
|
|
·
|
successfully educate physicians and patients about the benefits, risks, administration and use
of AMZEEQ;
|
|
·
|
obtain acceptance of AMZEEQ as safe and effective by patients and the medical community;
|
|
·
|
receive positive publicity related to AMZEEQ relative to the publicity related to our competitors’
products; and
|
|
·
|
maintain and defend our patent protection, seek additional protection and obtain regulatory exclusivity
for AMZEEQ and our other product candidates.
|
Any disruption in
our ability to generate revenues from the sale of AMZEEQ will have a material and adverse impact on our results of operations and
liquidity.
We are currently building our sales,
marketing and distribution capabilities, and if we are unable to expand such capabilities, our business, results of operations
and financial condition may be materially adversely affected.
In order to successfully
market AMZEEQ, we must continue to build and develop our sales, marketing, distribution, managerial, compliance and related capabilities
or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing, and
distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize AMZEEQ
and may not become profitable.
AMZEEQ is a newly-marketed
drug and, therefore, none of the members of our sales force has ever promoted AMZEEQ prior to its commercial launch. In addition,
we must train our sales force to ensure that a consistent and appropriate message about AMZEEQ is being delivered to our potential
customers. If we are unable to effectively train our sales force and equip them with effective materials, including medical and
sales literature to help them inform and educate potential customers about the benefits of AMZEEQ and its proper administration,
our efforts to successfully commercialize AMZEEQ could be harmed, which would negatively impact our ability to generate product
revenue.
Additionally, even
after initial development of our sales force and the commercial launch of AMZEEQ, we will need to maintain and further develop
our sales force, and we will be competing with other pharmaceutical and biotechnology companies to recruit, hire, train and retain
marketing and sales personnel. In the event we are unable to effectively develop and maintain our commercial team, including our
U.S. sales force, our ability to effectively commercialize AMZEEQ would be limited, and we would not be able to generate product
revenues successfully. There are risks involved both with establishing our own sales and marketing capabilities and with entering
into arrangements with third parties to perform these services. For example, any efforts to develop a sales and marketing organization
would be subject to numerous risks, including, but not limited to, the following:
|
·
|
recruiting and training a sales force is expensive and time consuming and could delay our product
launch;
|
|
·
|
we may be unable to recruit, retain or motivate adequate numbers of effective and qualified sales
and marketing personnel;
|
|
·
|
we may be unable to provide adequate training to sales and marketing personnel;
|
|
·
|
our sales personnel may be unable to obtain access to physicians or convince adequate numbers of
physicians to prescribe AMZEEQ;
|
|
·
|
there may be unforeseen costs and expenses associated with creating an independent sales and marketing
organization; and
|
|
·
|
we may incur significant unexpected expenses if the commercial launch of AMZEEQ is delayed or does
not occur for any reason.
|
If we do not establish
sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will
not be successful in commercializing our proposed products.
It will be difficult for us to profitably
sell AMZEEQ, FMX103 or our other product candidates if reimbursement for these products is limited by government authorities and
third-party payor policies.
In addition to any
healthcare reform measures which may affect reimbursement, market acceptance and sales of AMZEEQ, and, if approved, FMX103 and
our other product candidates will depend on the reimbursement policies of government authorities and third party payors. Government
authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications
they will pay for, and establish reimbursement levels.
A primary trend in
the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third party payors have attempted
to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement
will be available for AMZEEQ or FMX103, or, if reimbursement is available, the level of reimbursement.
Reimbursement may
impact the demand for, or the price of, any product for which we obtain marketing approval. In addition, third-party payors are
likely to impose strict requirements for reimbursement in order to limit off-label use of a higher priced drug. Reimbursement by
a third-party payor may depend upon a number of factors including the third-party payor’s determination that use of a product
is:
|
·
|
a covered benefit under its health plan;
|
|
·
|
safe, effective and medically necessary;
|
|
·
|
appropriate for the specific patient;
|
|
·
|
neither experimental nor investigational.
|
Obtaining coverage
and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that
could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to the payor.
We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure
that coverage or adequate reimbursement will be available for our product candidates, if approved. Also, we cannot be sure that
reimbursement amounts will not reduce the demand for, or the price of, our future products. If reimbursement is not available,
or is available only to limited levels, we may not be able to commercialize our product candidates, profitably or at all, even
if approved.
We may not receive market exclusivity
for our product candidates under the Hatch-Waxman Act since our lead product candidates are based on an “old antibiotic”
and therefore potential competitors may develop generic versions of our product(s) after launch that, if approved, could compete
directly with our product(s) sooner than we expect.
Statutory exclusivity
provides the holder of an approved NDA limited protection from new competition in the marketplace for the innovation represented
by its approved drug product and precludes approval of certain 505(b)(2) applications and ANDAs, including for a generic version
of the drug product, for prescribed periods of time. During the exclusivity period, the FDA may not approve a Section 505(b)(2)
application or ANDA to the extent it is subject to exclusivity, or in the case of exclusivity for a new chemical entity may not
receive a Section 505(b)(2) application or ANDA. Changes to a drug resulting from new clinical studies (other than bioavailability
studies) that were “essential to approval,” and conducted or sponsored by the applicant, such as a new dosage form,
strength, route of administration, dosing regimen or indication, are associated with a three-year period of exclusivity during
which the FDA cannot approve an ANDA or 505(b)(2) application for the change.
Drugs based on an
“old antibiotic,” such as minocycline, are subject to an additional limitation and will not receive three-year exclusivity
for a “condition of use” that was approved before October 8, 2008. Prior to 2008, drugs based on an “old antibiotic”
were not eligible for Hatch-Waxman Act exclusivity. In 2008, the Q1 Program Supplemental Funding Act of 2008 made drugs containing
old antibiotics eligible for three-year exclusivity under certain conditions, but excluded from eligibility for that exclusivity
any “condition of use” approved for such drugs before October 8, 2008. The statute does not define “condition
of use” but the U.S. District Court has provided guidance in Viropharma, Inc. v. Hamburg, 898 F. Supp.2d (District
of Columbia, 2012). In Viropharma, the court held that a supplemental new drug approval for the drug Vancocin was not eligible
for three-year exclusivity because the supplemental new drug application at issue did not constitute a “significant new use”
for the drug. The court held that the “inclusion of more specific dosing information that was within the range specified
in the prior label,” “new instructions on monitoring patients’ renal function,” and “new instructions
for the continuation of treatment in older patients” did not effect a “significant new use” but rather served
only to “refine labeling regarding already approved conditions of use.” The FDA also emphasized that had the company
sought approval for a new indication or a new dosing regimen, it would have had to comply with other statutory requirements (including
by providing new pediatric data), and that since the company did not have to provide the clinical data, it did not merit the three-year
exclusivity for old antibiotics.
We believe that the
clinical data submitted for our product candidates will satisfy the exclusivity requirements for old antibiotics. Our Phase III
clinical trials for AMZEEQ provided new clinical (including new pediatric) data that supported a topical route of administration,
a new dosing regimen and a significantly lower concentration of minocycline than the prior oral form. FMX103 is indicated for the
treatment of moderate-to-severe papulopustular rosacea, which is a new indication for minocycline. While we believe that any clinical
data submitted to support FMX103 and each of our other pipeline products containing an old antibiotic will provide the required
new significant benefits and uses to qualify for the three-year non-patent exclusivity, if the FDA and the U.S. courts do not agree
with us, the product candidate would not be protected by three-year exclusivity under the Hatch Waxman Act. While we would continue
to be able to enforce our patents listed in the FDA’s Orange Book against infringement by third-parties, including a 30-month
or any further stay or injunction from a court during the pendency of litigation, the FDA could approve an ANDA for a generic version
of our product and a company could launch the product at risk and we may not be able to obtain an injunction to prevent the launch,
which would allow a generic into the market sooner than we expect. In addition, even if the FDA awards three-year exclusivity to
each of these products, its scope will depend on how the FDA defines the exclusivity-protected change. If the FDA defines this
change more narrowly than we anticipate, the three-year exclusivity could provide less protection against generic competition than
expected. Moreover, even if we obtain three years marketing exclusivity an ANDA may be submitted at any time before the expiration
of market exclusivity.
AMZEEQ and, if approved, FMX103 will
face significant competition and our failure to compete effectively may prevent us from achieving significant market penetration
and expansion.
The approved indication
of AMZEEQ is to treat inflammatory lesions of non-nodular moderate-to-severe acne in patients 9 years of age and older, and the
expected indication of FMX103 is to treat moderate-to-severe papulopustular rosacea in adults. The facial aesthetic market in general,
and the market for acne treatments in particular, is highly competitive and dynamic, and is characterized by rapid and substantial
technological development and product innovations. AMZEEQ faces significant competition from other acne products, including oral
drugs such as Seysara, Solodyn, Doryx, Dynacin, Acticlate and Minocin, and topical anti-acne drugs such as Aklief, Acanya, Ziana,
Epiduo, Benzaclin, Aczone and Differin. FMX103, if approved, may face significant competition from other rosacea products, including
oral drugs such as Oracea®, and topical anti-rosacea drugs such as Metrogel, Soolantra and Finacea, all of which have been
approved for marketing and are currently available to consumers. AMZEEQ and, if approved, FMX103 may also compete with non-prescription
anti-acne and rosacea products and unapproved and off-label treatments.
There are also several
potential competing products currently under development. One of such potential competing products is a topical gel suspension
containing minocycline non-hydrochloride for the treatment of inflammatory skin disease, including acne and rosacea, developed
by Hovione, a manufacturer of active pharmaceutical ingredients and drug product intermediates, which product candidate has recently
completed Phase II clinical trials for the treatment of moderate-to-severe papulopustular rosacea and has obtained FDA input for
the design of a planned Phase III clinical trial. Another such potential competing product is a topical hydrophilic gel containing
minocycline hydrochloride for the treatment of acne, known as BPX-01, developed by BioPharmX Corporation, for which BioPharmX has
completed Phase IIa and Phase IIb clinical trials and has obtained FDA input for the design of a planned Phase III clinical trial.
BioPharmX has also announced positive results for its Phase IIb study for a topical minocycline gel named BPX-04 for the treatment
of rosacea. In addition, Sol-Gel is developing topical drugs containing microencapsulated benzoyl peroxide for the treatment of
rosacea and acne vulgaris and intends to submit an NDA for each candidate in 2020. If ultimately approved and launched in the U.S.,
these products would become direct competitors to AMZEEQ and FMX103.
To compete successfully
in the acne and rosacea treatment markets, we will have to continue to demonstrate that AMZEEQ is safe and effective for the treatment
of moderate-to-severe acne and to demonstrate that FMX103 is safe and effective for the treatment of moderate-to-severe rosacea,
and that they do not infringe the intellectual property rights of any third parties. Competing in the acne and rosacea markets
could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial
condition and results of operations.
Due to less stringent
regulatory requirements, there are many more acne products and procedures available for use in international markets than are approved
for use in the United States. There are also fewer limitations on the claims that our competitors in international markets can
make about the effectiveness of their products and the manner in which they can market them. As a result, if we partner with other
companies in these markets and launch our products, we may face more competition in these markets than in the United States.
In addition, we may
not be able to price AMZEEQ or, if approved, FMX103, competitively with current standard of care products or their price may drop
considerably due to factors outside our control. If this happens or the price of materials and manufacture increases dramatically,
our ability to continue to operate our business would be materially harmed and we may be unable to commercialize AMZEEQ or FMX103
successfully. Potential competitors may challenge, narrow, invalidate or seek to design around the claims of our granted patents
or our patent applications, and such patents and patent applications may fail to provide adequate protection for our product candidates.
Furthermore, such potential competitors may enter the market before us, and their products may be designed to circumvent our granted
patents and pending patent applications.
Because our Phase III clinical trials
for AMZEEQ and FMX103 were not conducted head-to-head with the current standard of care drugs, we may not compare our results to
those of existing drugs for promotional purposes, which may affect our sales and marketing efforts.
None of our Phase
III clinical trials for AMZEEQ and FMX103 were conducted in head-to-head comparison with the drugs considered the current standard
of care for the relevant indications, namely oral Solodyn for moderate-to-severe acne, and topical antimicrobials (such as Metrogel,
generic metronidazole and Finacea) for rosacea. This means that none of the patient groups participating in these trials were or
are being treated with the standard of care drugs alongside the groups treated with our product candidates.
The FDA generally
requires adequate, well-controlled head-to-head clinical trials to support comparative claims regarding marketed products. As a
result, we may not make promotional claims that compare AMZEEQ, FMX103 or any of our other product candidates that are commercialized
in the future to the current standards of care or other competitor products which may negatively impact sales of our products.
We may encounter delays in completing
clinical trials for our product candidates and may even be prevented from commencing such trials due to factors that are largely
beyond our control.
We have in the past
and may in the future experience delays in completing our ongoing clinical trials and in commencing future clinical trials. We
experienced significant delays in our Phase III clinical program for AMZEEQ, first due to quality control issues with certain active
ingredients supplied to us by a third party and due to insufficient results in one of the co-primary endpoints, namely IGA treatment
success, in one of the two initial Phase III trials, after which we conducted an additional Phase III clinical trial. Such difficulties
may arise again in future trials for other indications and for our product candidates.
We rely on clinical
research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While
we have agreements governing the committed activities of our CROs, we have limited influence over their actual performance. A failure
of one or more of our clinical trials can occur at any time during the clinical trial process. Clinical trials can be delayed or
aborted for a variety of other reasons, including delay or failure to:
|
·
|
obtain regulatory approval to commence a trial;
|
|
·
|
reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of
which may be subject to extensive negotiation and vary significantly among different CROs and trial sites;
|
|
·
|
obtain IRB approval at each site;
|
|
·
|
enlist suitable patients to participate in a trial;
|
|
·
|
have patients complete a trial or return for post-treatment follow-up;
|
|
·
|
ensure clinical sites observe trial protocol or continue to participate in a trial;
|
|
·
|
address any patient safety concerns that arise during the course of a trial;
|
|
·
|
address any conflicts with new or existing laws or regulations;
|
|
·
|
add a sufficient number of clinical trial sites; or
|
|
·
|
manufacture sufficient quantities of the product candidate for use in clinical trials.
|
Patient enrollment
is also a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of
the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the
clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages
of the drug being studied in relation to available alternatives, including any new drugs or treatments that may be approved for
the indications we are investigating.
We may also encounter
delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted,
by the trial’s data safety monitoring board, or by the FDA. Such authorities may suspend or terminate one or more of our
clinical trials due to a number of factors, including our failure to conduct the clinical trial in accordance with relevant regulatory
requirements or clinical protocols, inspection of the clinical trial operations or trial site by the FDA resulting in the imposition
of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes
in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
If we experience delays
in carrying out or completing any clinical trial of our product candidates, the commercial prospects of our product candidates
may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition,
any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval
process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly
harm our business and financial condition. In addition, many of the factors that cause, or lead to, a delay in the commencement
or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
AMZEEQ and FMX103 and other product
candidates may produce undesirable side effects that we may not have detected in our clinical trials. This could prevent us from
gaining market acceptance for AMZEEQ or marketing approval for our product candidates, or from maintaining such acceptance and
approval, and could substantially increase commercialization costs and even force us to cease operations.
To date, AMZEEQ and
FMX103 have not been associated with drug-related systemic side effects and only a few cases of mild and temporary skin reactions
have been reported, most of which disappeared on their own within 12 weeks from the beginning of the treatment. AMZEEQ
and FMX103 have both been observed to have a generally favorable safety profile, with the most commonly reported adverse events
related to upper respiratory tract infections, and there were no treatment-related serious adverse events reported. Nonetheless,
upon commercialization of AMZEEQ, and, if approved, FMX103 or other product candidates, the clinical exposure of the drugs will
be significantly expanded to a wider and more diverse group of patients than those participating in the clinical trials, which
may reveal undesirable side effects caused by these products that were not previously observed or reported in the current clinical
trials.
The FDA and foreign
regulatory agency regulations require that we report certain information about adverse medical events if our products may have
caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date on which we
become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within
the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if
it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of
our products. If we fail to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action including
criminal prosecution, the imposition of civil monetary penalties or seizure of our products.
Additionally, in the
event we discover the existence of adverse medical events or side effects caused by AMZEEQ or one of our product candidates, a
number of other potentially significant negative consequences could result, including:
|
·
|
sales of the product may be more modest than originally anticipated;
|
|
·
|
the FDA may suspend or withdraw its approval of the product;
|
|
·
|
the FDA may require the addition of labeling statements, such as warnings or contraindications
or distribution and use restrictions;
|
|
·
|
the FDA may require us to issue specific communications to healthcare professionals, such as letters
alerting them to new safety information about our product, changes in usage or other important information;
|
|
·
|
the FDA may issue negative publicity regarding the affected product, including safety communications;
|
|
·
|
we may be limited with respect to the safety-related claims that we can make in our marketing or
promotional materials;
|
|
·
|
we may be required to change the way the product is administered, conduct additional preclinical
studies or clinical trials or restrict or cease the distribution or use of the product;
|
|
·
|
perception of our products by physicians and patients may be adversely affected; and
|
|
·
|
we could be sued and held liable for harm caused to patients.
|
Any of these events
could prevent us from achieving or maintaining market acceptance of the affected product or product candidate and could substantially
increase commercialization costs or even force us to cease operations.
Even if FMX103 or
our other product candidates receive marketing approval, we may continue to face future developmental and regulatory difficulties.
In addition, we are subject to government regulations and we may experience delays in obtaining required regulatory approvals to
market our proposed product candidates.
Even if we receive approval of any regulatory filing for FMX103
or any of our other product candidates, the FDA may grant approval contingent on the performance of additional costly post-approval
clinical trials or REMS to monitor the safety or efficacy of the product, which could negatively impact us by reducing revenues
or increasing expenses, and cause the product not to be commercially viable. Absence of long-term safety data may further limit
the approved uses of our products, if any.
The FDA may also approve FMX103 or any of our other product
candidates for a more limited indication or a narrower patient population than we originally requested, or may not approve the
labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Furthermore,
any such approved product, including AMZEEQ, will remain subject to extensive regulatory requirements, including requirements relating
to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and recordkeeping.
If we fail to comply with the regulatory requirements of the
FDA, or if we discover previously unknown problems with any approved commercial products, manufacturers or manufacturing processes,
we could be subject to administrative or judicially imposed sanctions or other setbacks, which could require us to take corrective
actions, including to:
If we fail to comply with the regulatory requirements of the
FDA, or if we discover previously unknown problems with any approved commercial products, manufacturers or manufacturing processes,
we could be subject to administrative or judicially imposed sanctions or other setbacks, which could require us to take corrective
actions, including to:
|
•
|
suspend or impose restrictions on operations, including
costly new manufacturing requirements;
|
|
•
|
refuse to approve pending applications or supplements to
applications;
|
|
•
|
suspend any ongoing clinical trials;
|
|
•
|
suspend or withdraw marketing approval;
|
|
•
|
seek an injunction or impose civil or criminal penalties
or monetary fines;
|
|
•
|
seize or detain products;
|
|
•
|
ban or restrict imports and exports;
|
|
•
|
issue warning letters or untitled letters;
|
|
•
|
suspend or impose restrictions on operations, including
costly new manufacturing requirements; or
|
|
•
|
refuse to approve pending applications or supplements to
applications.
|
In addition, various aspects of our operations are subject to
federal, state or local laws, rules and regulations, any of which may change from time to time. Costs arising out of any regulatory
developments could be time-consuming and expensive and could divert management resources and attention and, consequently, could
adversely affect our business operations and financial performance.
We may decide not to continue developing
or commercializing any of our product candidates at any time during development or of any of our products after approval, which
would reduce or eliminate our potential return on investment for those product candidates or products.
We have in the past
and may again in the future decide to discontinue the development of any of our product candidates in our pipeline or not to continue
to commercialize any approved product. We may discontinue development of other product candidates for a variety of reasons, such
as the appearance of new technologies that make our product less commercially viable, resource allocation management, an increase
in competition from generic or other competing products, changes in or failure to comply with applicable regulatory requirements,
the discovery of unforeseen side effects during clinical development or after the approved product has been marketed or the occurrence
of adverse events at a rate or severity level that is greater than experienced in prior clinical trials. If we discontinue a program
in which we have invested significant resources, we will receive a limited return on our investment and we will have missed the
opportunity to have allocated those resources to other product candidates in our pipeline that may have had potentially more productive
uses.
If we are not successful in developing,
acquiring regulatory approval for and commercializing additional product candidates beyond AMZEEQ or FMX103, our ability to expand
our business and achieve our strategic objectives will be impaired.
Although we will devote
a substantial portion of our resources on the commercialization of AMZEEQ and on the potential approval of FMX103 for the treatment
of moderate-to-severe rosacea, another key element of our strategy is to discover, develop and commercialize products based on
our proprietary foam or other topical platforms to serve additional dermatology indications and therapeutic markets. We are seeking
to do so through our internal research programs, but our resources are limited, and our current programs are primarily geared towards
commercializing AMZEEQ and seeking regulatory approval for FMX103. We may also explore strategic collaborations for the development
or acquisition of new products and product candidates, but we may not be successful in entering into such relationships. While
we have received FDA approval for AMZEEQ and our NDA for FMX103 for the treatment of rosacea has been accepted by the FDA, all
of our other potential product candidates remain in earlier stages of development. Research programs to identify product candidates
require substantial technical, financial and human resources, regardless of whether any product candidates are ultimately identified.
Our research programs may initially show promise in identifying potential product candidates, yet may fail to yield product candidates
for clinical development for many reasons, including:
|
·
|
the research methodology used may not be successful in identifying potential product candidates;
|
|
·
|
competitors may develop alternatives that render our product candidates obsolete or less attractive;
|
|
·
|
product candidates we develop may nevertheless be covered by third parties’ patents or other
proprietary rights;
|
|
·
|
a product candidate may in a subsequent trial be shown to have harmful side effects or other characteristics
that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
|
|
·
|
a product candidate may not be capable of being produced in commercial quantities at an acceptable
cost, or at all;
|
|
·
|
a product candidate may not be accepted as safe and effective by patients, the medical community
or third party payors, if applicable;
|
|
·
|
creation of intellectual property rights, such as patents, which are necessary to protect our interests
in a product candidate, can be challenging in relation to pharmaceutical formulations and their uses with known active pharmaceutical
ingredients and generally used combinations of inactive ingredients approved by the FDA;
|
|
·
|
intellectual property rights, such as patents, which are necessary to protect our interests in
a product candidate, may be difficult to obtain or unobtainable or if obtained may be difficult to enforce or unenforceable;
|
|
·
|
intellectual property rights, such as patents, may fail to provide adequate protection, may be
challenged and one or more claims may be revoked or the patent may be held to be invalid; and
|
|
·
|
intellectual property rights of third parties may potentially block our entry into certain markets,
or make such entry economically impracticable.
|
We expect to rely on third parties
to conduct some or all aspects of our drug product manufacturing, production research and preclinical and clinical testing, and
these third parties may not perform satisfactorily.
We do not expect to
independently conduct all aspects of our drug product manufacturing, production research and preclinical and clinical testing.
We currently rely, and expect to continue to rely, on third parties with respect to these items, including manufacturing in the
commercial context.
We have arrangements
in place with two suppliers for the supply of the API of AMZEEQ and FMX103, and an exclusive supply agreement with ASM, for the
manufacturing and supply of our finished product of AMZEEQ. Pursuant to the agreement, ASM has agreed to manufacture and supply
all of our commercial needs for the products on an exclusive basis for a period of four years, subject to certain exceptions.
Our reliance on these
third parties for manufacturing, research and development activities will reduce our control over these activities but will not
relieve us of our responsibility to ensure compliance with all required regulations and study protocols. For example, for products
that we develop and commercialize on our own, we will remain responsible for ensuring that each of our IND-enabling studies and
clinical studies are conducted in accordance with the study plan and protocols, and that our products are manufactured in accordance
with cGMP as applied in the relevant jurisdictions.
If these third parties
do not successfully carry out their contractual duties, meet expected deadlines, conduct our studies in accordance with regulatory
requirements or our stated study plans and protocols, or manufacture our drug products in accordance with cGMP, we will not be
able to complete, or may be delayed in completing, the preclinical and clinical studies and manufacturing process validation activities
required to support future IND submissions and approval of our product candidates, or to support commercialization of AMZEEQ and,
if approved, FMX103 and our other product candidates. Many of our agreements with these third parties contain termination provisions
that allow these third parties to terminate their relationships with us upon notice. If we need to enter into alternative arrangements,
our product development and commercialization activities could be delayed.
Reliance on third
party subcontractors and suppliers entails a number of risks, including reliance on the third party for regulatory compliance and
quality assurance, the possible breach of the manufacturing or supply agreement by the third party, the possibility that the supply
is inadequate or delayed, the risk that the third party may enter the field and seek to compete and may no longer be willing to
continue supplying, and the possible termination or nonrenewal of the agreement by the third party at a time that is costly or
inconvenient for us. In addition, third party subcontractors and suppliers may not be able to comply with cGMP or quality system
regulation or similar regulatory requirements outside the U.S. If any of these risks transpire, we may be unable to timely retain
alternate subcontractors or suppliers on acceptable terms and with sufficient quality standards and production capacity, which
may disrupt and delay the manufacture and commercial sale of AMZEEQ or our product candidates, if approved, and may disrupt and
delay our clinical trials.
We may be forced to
manufacture our product ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different
manufacturer, which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills required to manufacture
our product candidates may be unique or proprietary to the original manufacturer, and we may have difficulty or there may be contractual
restrictions prohibiting us from, transferring such skills to a back-up or alternate supplier, or we may be unable to transfer
such skills at all. Any of these events could lead to clinical study delays or failure to obtain marketing approval, or impact
our ability to successfully commercialize our product or any future products. Some of these events could be the basis for FDA action,
including injunction, recall, seizure or total or partial suspension of production.
Supply interruptions may disrupt
our inventory levels and the availability of our product and product candidates and cause delays in obtaining regulatory approval
for our product candidates or harm our business by reducing our revenues.
We depend on a limited
number of manufacturing facilities to manufacture our finished products and product candidates. Numerous factors could cause interruptions
in the supply or manufacture of our products and product candidates, including:
|
·
|
timing, scheduling and prioritization of production by our contract manufacturers or a breach of
our agreements by our contract manufacturers;
|
|
·
|
changes in our sources for manufacturing;
|
|
·
|
the timing and delivery of shipments;
|
|
·
|
our failure to locate and obtain replacement suppliers and manufacturers as needed on a timely
basis; and
|
|
·
|
conditions affecting the cost and availability of raw materials.
|
If one of our suppliers
or manufacturers fails or refuses to supply us with necessary raw materials or finished products or product candidates on a timely
basis or at all, it would take a significant amount of time and expense to qualify a new supplier or manufacturer. We may not be
able to obtain active ingredients or finished products from new suppliers or manufacturers on acceptable terms and at reasonable
prices, or at all.
Any interruption in
the supply of finished products could hinder our ability to distribute finished products to meet commercial demand and adversely
affect our financial results and financial condition.
With respect to our
product candidates, production of product is necessary to perform clinical trials and successful registration batches are necessary
to file for approval to commercially market and sell product candidates. Delays in obtaining clinical material or registration
batches could adversely impact our clinical trials and delay regulatory approval for our product candidates.
Collaboration arrangements that
we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our
product and product candidates.
We may seek collaboration arrangements
with pharmaceutical or biotechnology companies for the development or commercialization of our product and product candidates in
the future. For example, in April 2020, we entered into a license agreement with Cutia pursuant to which we granted Cutia exclusive
rights to obtain regulatory approval of and commercialize AMZEEQ and FMX103 and FCD105, if and as approved by the FDA, in China,
Taiwan, Hong Kong and Macau. We may enter into other arrangements on a selective basis, depending on the merits of retaining commercialization
rights ourselves compared to entering into selective collaboration arrangements with pharmaceutical or biotechnology companies
internationally and possibly also in the United States. Any such collaboration arrangements may not be successful.
In addition, the success of future collaboration
arrangements that we may enter into will depend heavily on the efforts and activities of our collaborators. Collaborators generally
have significant discretion in determining the efforts and resources that they will apply to these collaborations.
When entering collaboration arrangements,
we are subject to a number of risks, including:
|
·
|
collaborators may delay clinical trials, provide insufficient funding
for a clinical trial, stop a clinical trial or abandon products, repeat or conduct new clinical trials, require a new formulation
of products for clinical testing, may decide not to pursue development and commercialization of a product or product candidate
or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in their
strategic focus due to their acquisition of competitive products or their internal development of competitive products, availability
of funding or other external factors, such as a business combination that diverts resources or creates competing priorities;
|
|
·
|
any safety issues or adverse side effects that result from trials
conducted by a collaborator will adversely impact our ability to obtain regulatory approval for our product candidates;
|
|
·
|
any failure by a collaborator to demonstrate efficacy of a product
candidate in its clinical trials could decrease the perceived likelihood of success for our clinical trials;
|
|
·
|
disagreements between parties to a collaboration arrangement regarding
clinical development and commercialization matters may lead to delays in the development process or commercializing the applicable
product candidate and, in some cases, termination of the collaboration arrangement;
|
|
·
|
collaboration arrangements are complex and time consuming to negotiate,
document and implement, and we may not be successful in our efforts to establish and implement collaborations or other alternative
arrangements should we so chose to enter into such arrangements;
|
|
·
|
collaborations with pharmaceutical or biotechnology companies and
other third parties often are terminated or allowed to expire by the other party and any such termination or expiration would adversely
affect us financially and could harm our business reputation;
|
|
·
|
collaboration agreements may be terminated and, if terminated, may
result in delays or the need for a new collaborator or additional capital to pursue further development or commercialization of
our product or product candidates in certain markets;
|
|
·
|
collaborators could independently develop, or develop with third parties,
products that compete directly or indirectly with our product or product candidates;
|
|
·
|
terms of any collaborations or other arrangements that we may establish
may not be favorable to us;
|
|
·
|
we could grant exclusive rights to our collaborators that would prevent
us from collaborating with others;
|
|
·
|
we will face, to the extent that we decide to enter into collaboration
agreements, significant competition in seeking appropriate collaborators;
|
|
·
|
collaborators may not properly use, maintain or defend our confidential
information and intellectual property rights or may use our intellectual property or proprietary information in a way that gives
rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information
or expose us to potential liability;
|
|
·
|
collaborators may own or co-own intellectual property covering products
that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize
such intellectual property;
|
|
·
|
disputes may arise with respect to the ownership of any intellectual
property developed pursuant to our collaborations;
|
|
·
|
collaborators’ sales and marketing activities or other operations
may not be in compliance with applicable laws resulting in civil or criminal proceedings;
|
|
·
|
adverse regulatory determinations or other legal action may interfere
with the ability of a collaborator to conduct clinical trials or other development activity;
|
|
·
|
one or more collaborators may be subject to regulatory or legal action
resulting from the failure to meet healthcare industry compliance requirements in the conduct of clinical trials or the promotion
and sale of products; and
|
|
·
|
collaboration arrangements could be adversely impacted by changes
in collaborators’ key management personnel and other personnel that are administering collaboration agreements.
|
We expect to rely on third parties
to conduct, supervise and monitor our clinical studies, and if these third parties perform in an unsatisfactory manner, it may
harm our business.
We also rely on medical
institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to assist
us in conducting our clinical trials for our other product candidates. While we will have agreements governing their activities,
we will have limited influence over their actual performance. We will control only certain aspects of our CROs’ activities.
Nevertheless, we will be responsible for ensuring that each of our clinical studies is conducted in accordance with the applicable
protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities.
We and our CROs are
required to comply with the FDA’s and other regulatory authorities’ good clinical practices, or GCPs, for conducting,
recording and reporting the results of clinical studies to assure that the data and reported results are credible and accurate,
and that the rights, integrity and confidentiality of clinical study participants are protected. If we or our CROs fail to comply
with applicable GCPs, the clinical data generated in our future clinical studies may be deemed unreliable and the FDA and other
regulatory authorities may require us to perform additional clinical studies before approving any marketing applications.
If the third parties
or consultants that assist us in conducting our clinical trials do not perform their contractual duties or obligations, experience
work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or
accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs,
or for any other reason, we may need to conduct additional clinical trials or enter into new arrangements with alternative third
parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may
need to be repeated. If any of the foregoing were to occur, we may not be able to obtain, or may be delayed in obtaining, regulatory
approval for the product candidates being tested in such trials, and will not be able to, or may be delayed in our efforts to,
successfully commercialize these product candidates.
Results obtained
in non-clinical studies and completed clinical trials may not predict success in later clinical trials.
Success in non-clinical testing and early
clinical trials does not ensure that later clinical trials will be successful, and any other clinical trials that we may conduct
may not demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates in
any indication. We and other companies in the biopharmaceutical industry have frequently suffered significant setbacks in later
clinical trials, even after achieving promising results in earlier non-clinical studies or clinical trials. For example, our completed
Phase II clinical trials of serlopitant for the treatment of refractory chronic cough, for the treatment of pruritus associated
with atopic dermatitis and for the treatment of CPUO did not meet their primary or key secondary endpoints and our completed Phase
III clinical trials for the treatment of pruritis associated with PN did not meet their primary endpoints.
The primary efficacy analysis in our completed
Phase II clinical trials of chronic pruritus and pruritus associated with PN was a statistically significant change in itch visual
analogue scale, or VAS, from baseline compared to placebo measured at week six or eight. Based upon our interactions with the FDA,
we used a different efficacy analysis for our Phase III clinical trials for pruritus associated with PN, a 4-point responder rate
on the worst-itch numeric rating scale, or WI-NRS. We analyzed 4-point responders in our chronic pruritus and PN Phase II clinical
trials after the completion of the studies. The analyses of the percentage of patients with at least a 40 mm response in VAS, or
a 4-point response on WI-NRS, were not pre-specified in our initial completed Phase II clinical trials’ statistical analysis
plans and are thus considered post-hoc analyses. For these and other reasons, we could not predict serlopitant’s ability
to demonstrate a statistically significant reduction in pruritus using this measure in our Phase III clinical trial for pruritus
associated with PN.
We have incurred significant losses
since our inception, and anticipate that we will continue to incur losses for the foreseeable future. Our limited operating history
makes it difficult to assess our future viability.
To date, we have focused
principally on developing AMZEEQ, FMX103. FCD105 and serlopitant. Since the Merger closed on March 9, 2020, we have only limited
operating history as a combined company upon which stockholders can evaluate our business and prospects and we have only generated
revenue from product sales since the launch of AMZEEQ in January 2020. We continue to incur significant research and development
and other expenses related to our ongoing clinical trials and operations. As of March 31, 2020, we had an accumulated
deficit of $350.9 million. We recorded net losses of $40.2 million and $15.2 million for the three months ended March 31, 2020
and 2019, respectively. Menlo’s net loss for the years ended December 31, 2019, 2018 and 2017 was approximately $73.7 million,
$51.4 million, and $29.1 million, respectively. As of December 31, 2019, Menlo had an accumulated deficit of $184.3 million. Foamix’s
net loss for the years ended December 31, 2019, 2018 and 2017 was approximately $95.2 million, $74.2 million and $65.7 million,
respectively. As of December 31, 2019, Foamix had an accumulated deficit of $310.6 million. We may continue to incur losses for
some time, and these losses may increase as we advance our commercialization of AMZEEQ and as we continue our development, seek
regulatory approval of, and, if approved, begin to commercialize FMX103. Even if we achieve profitability in the future, we may
not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and
will continue to have an adverse effect on our stockholders’ equity and working capital.
In connection with the Merger, we
became a guarantor and an obligor under the Credit Agreement and have become subject to various financial and other restrictive
covenants. Substantially all of our assets are also secured in connection with the Credit Agreement. These restrictions may limit
our operational or financial flexibility and failure on the part of us or any other obligor under the Credit Agreement to comply
with these covenants could subject us to defaults under the Credit Agreement.
Foamix Pharmaceuticals
Inc., a Delaware corporation (the “Borrower”), Foamix and the Company, each as a guarantor, the lenders party thereto,
and Perceptive Credit Holdings II, LP, as administrative agent for the lenders, entered into that certain Amended and Restated
Credit Agreement and Guaranty, dated as of March 9, 2020 (the “Credit Agreement”). We have guaranteed the indebtedness
obligation of the Borrower under the Credit Agreement and in connection with the Credit Agreement also granted a first priority
security interest in substantially all of our assets for the benefit of the lenders.
The Credit Agreement
provides for a senior secured delayed draw term loan facility in an aggregate principal amount of $50.0 million, and as of March
31, 2020, approximately $35.0 million of loans were outstanding under the Credit Agreement. The Borrower will be permitted to borrow
an additional $15 million before September 30, 2020 provided that the Borrower achieves certain revenue targets set forth in the
Credit Agreement. The Credit Agreement contains restrictive covenants that limit our (including Foamix and the Borrower’s)
ability to incur new indebtedness, create or grant liens on assets, make or enter into transactions that result in certain fundamental
corporate changes, such as mergers or acquisitions, sell assets, change business activities, make certain investments or payments,
pay dividends, change fiscal periods, enter into or become bound by certain inbound and outbound licenses, or enter into transactions
with affiliates. The Credit Agreement also contains certain financial covenants, requiring that (i) we (including Foamix and the
Borrower) maintain a minimum liquidity (aggregate cash balance of $2.5 million) and (ii) we (including Foamix and the Borrower)
achieve certain revenue targets as of a specific date. Additionally, the Company is monitoring ongoing developments in connection
with the COVID-19 pandemic, which may have an adverse impact on the Company’s commercial prospects, projected cash position
and ability to remain in compliance with these covenants.
The restrictive covenants
in the Credit Agreement may limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict
our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage
in other business activities that could be in our interest. Our ability to comply with the financial covenants can be affected
by events beyond our control and it may not be able to do so. If we or any other obligor under the Credit Agreement is unable to
remain in compliance with any of the covenants under the Credit Agreement, then it would cause a default under the Credit Agreement
and amounts outstanding thereunder may be accelerated and become due immediately. Any such acceleration of debt could have a material
adverse effect on our financial condition and results of operations.
In addition, our indebtedness
under the Credit Agreement in connection with our guaranty obligations or in the event that we incur additional indebtedness from
another source could have an adverse impact on our business or operations. For example, it could:
|
•
|
limit our flexibility in planning for the development of pipeline product candidates and the commercialization
of products (including AMZEEQ) and the approval and marketing of products (including FMX103);
|
|
•
|
increase our vulnerability to both general and industry-specific
adverse economic conditions; and
|
|
•
|
limit our ability to obtain additional funds for working capital, capital expenditures, acquisitions,
general corporate and other purposes.
|
Any current or future
indebtedness that we incur under the Credit Agreement will require us to make certain interest and principal payments. Our ability
to make payments on any indebtedness (including indebtedness in connection with the guaranty obligations pursuant to the Credit
Agreement) depends on our ability to generate cash in the future. It is expected that we will experience negative cash flow for
the foreseeable future as it funds its operations and capital expenditures. As a result, we may not be in a position to repay this
indebtedness when due or obtain extensions to the maturity date. In order to repay these obligations when due, we may be required
to sell assets, to refinance all or a portion of such indebtedness or to obtain additional financing, including on terms that are
less favorable to us. If that additional financing involves the sale of equity securities or convertible securities, it would result
in the issuance of additional shares of capital stock, which would result in dilution to our stockholders.
Changes in interest
rates could adversely affect our earnings and/or cash flows.
Loans under the Credit
Agreement are made at variable rates that use LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of
recent proposals for reform. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends
to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods
of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely
predicted and could have an adverse impact on the market value for or value of LIBOR-linked loans that are due under the Credit
Agreement. Changes in market interest rates may influence the financing costs and could reduce our earnings and cash flows.
If we fail to attract and keep senior
management and key scientific and commercial personnel, we may be unable to successfully develop FMX103 or any of our other product
candidates, conduct our clinical trials and commercialize AMZEEQ, or FMX103 or any of our other products we develop.
Our success depends
in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific and commercial
personnel. We believe that our future success is highly dependent upon the contributions of our senior management, particularly
our Chief Executive Officer, as well as key sales personnel and our senior technologists and scientists. The loss of services of
any of these individuals could delay or prevent the successful development of our product pipeline or successful commercialization
of AMZEEQ, FMX103, if approved, or any of the clinical development of our other product candidates.
Although we have not
historically experienced unique difficulties in attracting and retaining qualified employees, we could experience such problems
in the future. For example, competition for qualified personnel in the pharmaceutical field is intense due to the limited number
of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we
expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable
terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have
been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers
own their research output.
Unfavorable global economic conditions
could adversely affect our business, financial condition or results of operations.
Although we believe
the market for acne and rosacea therapies is less vulnerable to unfavorable economic conditions due to the significant discomfort
and distress that these conditions inflict, our results of operations could be adversely affected by general conditions in the
global economy and in the global financial markets. We currently have very limited visibility regarding the prospects of AMZEEQ,
FMX103 or our other product candidates becoming eligible for reimbursement by any government or third party payor and the possible
scope of such reimbursement, and we must assume that demand for these product candidates may be tied to discretionary spending
levels of our targeted patient population. A severe or prolonged economic downturn could result in a variety of risks to our business,
including weakened demand for AMZEEQ, or if approved, FMX103 or any of our other product candidates, and our ability to raise additional
capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting
in supply disruption, or cause our customers to delay making payments for our services.
Any of the foregoing
could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions
could adversely impact our business.
Exchange rate fluctuations between
the U.S. dollar and the New Israeli Shekel may negatively affect our earnings.
The dollar is our
functional and reporting currency. However, a portion of our operating expenses are incurred in NIS. As a result, we are exposed
to the risks that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the
inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind
inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results
of operations would be adversely affected. We cannot predict any future trends in the rate of inflation or deflation in Israel
or the rate of devaluation or appreciation of the NIS against the dollar. For example, the NIS appreciated against the dollar by
7.8% in 2019, which appreciation was compounded by inflation at the rate of 0.6% that year, while in 2018 the NIS depreciated by
8.1% against the dollar, which depreciation was partly offset by inflation in Israel of 0.8% that year. If the dollar cost of our
operations in Israel increases, our dollar-measured results of operations will be adversely affected. Our operations also could
be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.
If we seek
and obtain approval to commercialize our products outside of the United States, a variety of risks associated with international
operations could materially adversely affect our business.
If our drug products are approved for commercialization
outside the United States, we may choose to commercialize it ourselves or enter into agreement with third parties to do so. If
we chose to directly commercialize internationally, we expect that we will be subject to additional risks, including:
|
·
|
different regulatory requirements for drug approvals in foreign countries;
|
|
·
|
differing United States and foreign drug import and export rules;
|
|
·
|
different protection for intellectual property rights in foreign countries;
|
|
·
|
different and additional regulatory requirements regarding data privacy
(e.g. the California Consumer Privacy Act and the EU General Data Protection Regulation);
|
|
·
|
unexpected changes in tariffs, trade barriers and regulatory requirements;
|
|
·
|
different reimbursement systems, and different competitive drugs;
|
|
·
|
economic weakness, including inflation, or political instability in
particular foreign economies and markets;
|
|
·
|
compliance with tax, employment, immigration and labor laws for employees
living or traveling abroad;
|
|
·
|
foreign taxes, including withholding of payroll taxes;
|
|
·
|
foreign currency fluctuations, which could result in increased operating
expenses and reduced revenues, and other obligations incident to doing business in another country;
|
|
·
|
workforce uncertainty in countries where labor unrest is more common
than in the United States;
|
|
·
|
production shortages resulting from any events affecting raw material
supply or manufacturing capabilities abroad;
|
|
·
|
potential liability resulting from development work conducted by these
distributors; and
|
|
·
|
business interruptions resulting from geopolitical actions, including
war and terrorism, or natural disasters.
|
We may become subject to lawsuits
that could have a material adverse impact on our business, results of operations and financial condition.
From time to time and in the ordinary course
of our business, we may become involved in various lawsuits, in addition to product liability lawsuits and lawsuits to protect
and enforce our intellectual property. These lawsuits may include claims initiated by our third-party collaborators, suppliers,
manufacturers, former employees, contractors or vendors and claims related to the sale of securities and related disclosure. For
example, in November 2018 and January 2019, putative securities class action complaints were filed against Menlo, certain former
executive officers and directors, and certain underwriters in our IPO. The complaints allege violations of Sections 11 and 15 of
the Securities Act of 1933 due to allegedly false and misleading statements in connection with the IPO. The parties have mediated
the consolidated lawsuit and reached a settlement. The settlement is subject to final documentation and Court approval. These lawsuits
may also include future lawsuits filed in connection with the Merger.
All such lawsuits
are inherently unpredictable and, regardless of the merits of the claims, litigation may be expensive, time-consuming and disruptive
to our operations and distracting to management. If resolved against us, such lawsuits could result in excessive verdicts, injunctive
relief or other equitable relief that may affect how we operate our business. Similarly, if we settle such lawsuits, it may affect
how we operate our business. Future court decisions, alternative dispute resolution awards, business expansion or legislative activity
may increase our exposure to litigation and regulatory investigations. In some cases, substantial non-economic remedies or punitive
damages may be sought. Although we maintain liability insurance coverage, including director and officer insurance with liability
coverage limits, such coverage may not cover any particular verdict, judgment or settlement that may be entered against us, or
our officers and directors, and such coverage may not prove to be adequate or such coverage may not continue to remain available
on acceptable terms or at all. If we incur liability that exceeds our insurance coverage or that is not within the scope of the
coverage in lawsuits brought against us, it could have a material adverse effect on our business, results of operations and financial
condition.
If product liability lawsuits are
brought against us, we may incur substantial liabilities that may not be fully covered by our insurance policies and we may be
required to limit commercialization of any of our other products we develop.
We face an inherent
risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk as we
commercialize AMZEEQ and any other product candidates that receive marketing approval. For example, we may be sued if any product
we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale.
Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of
dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state
consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial
liabilities or be required to limit commercialization of our products. Even a successful defense would require significant financial
and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
|
·
|
decreased demand for AMZEEQ, FMX103 or any of our other product candidates or products we develop;
|
|
·
|
injury to our reputation and significant negative media attention;
|
|
·
|
withdrawal of clinical trial participants or delays or cancellation of clinical trials;
|
|
·
|
significant costs to defend the related litigation, which may be only partially recoverable even
in the event of successful defense;
|
|
·
|
substantial monetary awards paid to trial participants or patients;
|
|
·
|
regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;
|
|
·
|
reduced resources of our management to pursue our business strategy; and
|
|
·
|
the inability to commercialize any drugs that we may develop.
|
Although we maintain
product liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount
that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance
policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no
coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations
or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover,
in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against
losses.
We currently develop our clinical
drug product candidates in our research and development facility located in Rehovot, Israel and through partnerships with external
contract manufacturing organizations. If these facilities or any future facility or our equipment were to be damaged or destroyed,
or if we experience a significant disruption in our operations for any other reason, our ability to continue to operate our business
could be materially harmed.
We currently research
and develop our product candidates primarily in our laboratory located in Rehovot, Israel and through partnership with external
contract manufacturing organizations. If these or any future facilities were to be damaged, destroyed or otherwise unable to operate,
whether due to war, acts of hostility, earthquakes, fire, floods, hurricanes, storms, tornadoes, other natural disasters, employee
malfeasance, terrorist acts, power outages or otherwise, or if performance of our research and development facility is disrupted
for any other reason, such an event could delay our clinical trials. If we experience delays in achieving our development objectives,
or if we are unable to manufacture an approved product within a timeframe that meets our prospective customers’ expectations,
our business, prospects, financial results and reputation could be materially harmed.
Currently, we maintain
insurance covering damage to our property and equipment and workers compensation coverage, subject to deductibles and other limitations.
If we have underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage
under our insurance policies, we may not be able to cover our losses.
Our facilities and operations in
Israel may be adversely affected by political, economic and military instability in the region.
Certain of our offices
are located in Rehovot, Israel. In addition, some of our key employees and one of our directors are residents of Israel. Accordingly,
political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Over the past decade,
Israel has been engaged in several armed conflicts with Hamas, a terrorist group and political party that controls the Gaza Strip,
and other terrorist groups from the Gaza Strip. During the summer of 2006, Israel was engaged in an armed conflict with Hezbollah,
a Lebanese Islamist Shiite terrorist group and political party. These conflicts have involved missile strikes against civilian
targets in various parts of Israel, including the area where our facilities are located, and negatively affected business conditions
in Israel. Any future hostilities involving Israel, or terrorist activities or political instability in the region, could interrupt
or curtail trade between Israel and its trading partners, which could adversely affect our results of operations. Any such further
armed conflicts could furthermore make it more difficult for us to raise capital. In addition, operations could be disrupted by
the obligations of our Israeli personnel to perform military reserve service as a result of any such further conflicts.
Our commercial insurance
does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although
the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist
attacks or acts of war, this government coverage may not be maintained, or if maintained, may be insufficient to compensate us
fully for damages incurred. Any losses or damages incurred by our Israeli operations could have a material adverse effect on our
business.
Further, certain countries,
as well as certain companies and organizations, continue to participate in a boycott of Israeli businesses and businesses with
large Israeli operations. Such boycott or other restrictive laws, policies or practices may have a material adverse effect on our
business and financial condition in the future.
Risks Related to
Government Regulation
We are subject to various U.S. federal,
state, local and foreign health care fraud and abuse laws, including anti-kickback, self-referral, false claims and fraud laws,
health information privacy and security, and transparency laws, and any violations by us of such laws could result in substantial
penalties or other consequences including criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished
profits and future earnings. Additionally, any challenge to or investigation into our practices under these laws could cause adverse
publicity and be costly to respond to, and thus could harm our business.
There are numerous
U.S. federal, state, local and foreign health care fraud and abuse laws pertaining to our business, including anti-kickback, false
claims and physician transparency laws. Our business practices and relationships with providers, patients and third-party payors
are subject to scrutiny under these laws. These laws may impact, among other things, our potential sales, marketing, patient assistance
and education programs. We may also be subject to patient information privacy and security regulation by both the federal government,
states and foreign jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability
to operate include:
|
·
|
the U.S. federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully
offering, soliciting, receiving, or paying remuneration directly or indirectly, in cash or in kind to induce or reward either the
referral of an individual for, or the purchase, order or recommendation of goods or services for which payment may be made in whole
or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything
of value, including cash, improper discounts, and free or reduced price items and services. The intent standard under the federal
Anti-Kickback Statute was amended by the ACA to a stricter standard such that a person or entity no longer needs to have actual
knowledge of the statute or specific intent to violate it, in order to have committed a violation. In addition, the ACA provides
that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the FCA. Additionally, many states have similar laws that apply to their state health care programs
as well as private payors. Violations of the federal or state anti-kickback laws can result in exclusion from federal and state
health care programs and substantial civil and criminal penalties.
|
|
·
|
the federal civil and criminal false claims laws and civil monetary penalties laws, including the
FCA, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false, fictitious
or fraudulent claims for payment from Medicare, Medicaid or other federal healthcare programs, and knowingly making, using or causing
to be made or used a false record or statement material to a false or fraudulent claim to avoid, decrease or conceal an obligation
to pay money to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a
claim includes “any request or demand” for money or property presented to the federal government. Even where pharmaceutical
companies do not submit claims directly to payors, they can be held liable under these laws if they are deemed to “cause”
the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers,
promoting a product off-label, marketing products of sub-standard quality, or, as noted above, paying a kickback that results in
a claim for items or services. In addition, activities relating to the reporting of wholesaler or estimated retail prices for pharmaceutical
products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state
and third-party reimbursement for such products, and the sale and marketing of such products, are subject to scrutiny under this
law. For example, several pharmaceutical and other healthcare companies have faced enforcement actions under these laws for allegedly
inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement
rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs
for the product. Private individuals or “whistleblowers” can bring FCA “qui tam” actions on behalf of the
government and may share in recovered amounts. The FCA has been used to prosecute persons submitting claims for payment that are
inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. Proof
of intent to deceive is not required to establish liability under the civil False Claims Act.
|
|
·
|
HIPAA, which imposes criminal and civil liability for, among other things, executing or attempting
to execute a scheme to defraud any healthcare benefit program, including any third party payors, knowingly and willfully embezzling
or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly
and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements
or representations, or making false statements relating to healthcare benefits, items or services. Similar to the federal Anti-Kickback
Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed
a violation;
|
|
·
|
HIPAA, as amended by HITECH, and their respective implementing regulations, including the Final
Omnibus Rule published on January 25, 2013, which impose, among other things, obligations, including mandatory contractual terms,
with respect to safeguarding the privacy, security and transmission of individually identifiable health information held by certain
healthcare providers, health plans and healthcare clearinghouses, known as “covered entities,” and “business
associates.” Among other things, HITECH made certain aspects of HIPAA’s rules (notably the Security Rule) directly
applicable to business associates - independent contractors or agents of covered entities that receive or obtain individually identifiable
health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of
civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave
state attorneys general new authority to file civil actions for damages or injunctions in federal court to enforce the federal
HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. The Department of Health and
Human Services Office for Civil Rights, or the OCR, has increased its focus on compliance and continues to train state attorneys
general for enforcement purposes. The OCR has recently increased both its efforts to audit HIPAA compliance and its level of enforcement,
with one recent penalty exceeding $5 million. In addition, according to the United States Federal Trade Commission, or the FTC,
failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in
or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, or the FTCA, 15 USC § 45(a). The FTC
expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer
information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.
Medical data is considered sensitive data that merits stronger safeguards. The FTC’s guidance for appropriately securing
consumers’ personal information is similar to what is required by the HIPAA Security Rule;
|
|
·
|
the federal Physician Payments Sunshine Act and its implementing regulations, which require certain
manufacturers of prescription drugs, devices and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program to annually report to CMS information related to payments and other transfers of value
to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, or to
entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals, as well as ownership
and investment interests held by physicians and their immediate family members. On October 25, 2018, President Trump signed into
law the “Substance Use-Disorder Prevention that Promoted Opioid Recovery and Treatment for Patients and Communities Act.”
This law, in part (under a provision entitled “Fighting the Opioid Epidemic with Sunshine”), will extend the Sunshine
Act to payments and transfers of value to physician assistants, nurse practitioners, and other mid-level healthcare providers (with
reporting requirements going into effect in 2022 for payments made in 2021). In addition, Section 6004 of the ACA requires annual
reporting of information about drug samples that manufacturers and authorized distributors provide to physicians;
|
|
·
|
analogous state, local and foreign laws and regulations, such as state anti-kickback and false
claims laws, and other states’ laws addressing the pharmaceutical and healthcare industries, may apply to sales or marketing
arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private
insurers, and in some cases that may apply regardless of payor, i.e., even if reimbursement is not available; state laws
that require drug companies to comply with the industry’s voluntary compliance guidelines (the PhRMA Code) and the applicable
compliance program guidance promulgated by the federal government (HHS-OIG) or otherwise prohibit or restrict gifts or payments
that may be made to healthcare providers and other potential referral sources; state and local laws that require the licensure
of sales representatives; state laws that require drug manufacturers to report information related to drug pricing or payments
and other transfers of value to healthcare providers or marketing expenditures and pricing information; and state laws related
to insurance fraud in the case of claims involving private insurers;
|
|
·
|
data privacy and security laws and regulations in foreign jurisdictions that may be more stringent
than those in the United States, such as the European Union, which adopted the General Data Protection Regulation (GDPR), which
became effective in May 2018. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of
the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality
of the personal data, data breach notification and the use of third party processors in connection with the processing of personal
data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, provides
an enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million
or 4% of the annual global revenues of the noncompliant company, whichever is greater. The recent implementation of the GDPR has
increased our responsibility and liability in relation to personal data that we process, including in clinical trials, and we may
in the future be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert management’s
attention and increase our cost of doing business; and
|
|
·
|
State laws governing the privacy and security of health information in certain circumstances, many
of which differ from each other in significant ways and may not have the same effect, and may apply more broadly than HIPAA, thus
complicating compliance efforts – for example, the California Consumer Privacy Act, or CCPA, which became effective on January
1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights
to California residents, including the right to opt out of certain disclosures of their information. The CCPA also creates a private
right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach.
Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and the California Attorney
General will issue clarifying regulations. Although the law includes limited exceptions, including for certain information collected
as part of clinical trials as specified in the law, it may regulate or impact our processing of personal information depending
on the context. It remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted.
|
These and similar
laws may be subject to amendment or reinterpretation, and implementing regulations may be revised or reinterpreted, in ways that
may significantly affect our business. For example, in October 2019 U.S. Department of Health and Human Services issued a proposed
rule that would make changes to the federal Anti-Kickback Statute. State and federal authorities have aggressively targeted pharmaceutical
companies for alleged violations of these fraud and abuse laws based on improper research or consulting contracts with doctors,
certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes, and other improper promotional practices.
Efforts to ensure
that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial
costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future
statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations
are found to be in violation of any of the health regulatory laws described above or any other laws or regulations that apply to
us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines,
disgorgement, individual imprisonment, exclusion from participation in government healthcare programs, debarment from contracting
with the U.S. government, injunctions and private qui tam actions brought by individual whistleblowers in the name of the government.
Companies targeted in such actions have, among other consequences, paid substantial fines in the hundreds of millions of dollars
or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate
integrity agreements that severely restrict the manner in which they conduct their business, including the requirement of additional
reporting and oversight obligations. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe
harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future
practices might be challenged under one or more of these laws. Responding to investigations, enforcement actions and litigation
can be time-and resource-consuming and can divert management’s attention from the business. Any such investigation, action,
litigation or settlement could increase our costs or otherwise have an adverse effect on our business and reputation. Even an unsuccessful
challenge or investigation into our practices could cause adverse publicity and be costly to respond to. In addition, the approval
and commercialization of any of our product candidates outside the U.S. will also likely subject us to non-U.S. equivalents of
the healthcare laws mentioned above, among other non-U.S. laws.
If the FDA does not conclude that
FMX103 satisfies the requirements under Section 505(b)(2) of the Federal Food, Drug and Cosmetics Act, or Section 505(b)(2), or
if the requirements for FMX103 under Section 505(b)(2) are not as we expect, the approval pathway will likely take significantly
longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may
not be successful.
We have submitted
an NDA for FMX103 under the FDA’s 505(b)(2) regulatory pathway. The Hatch-Waxman Act added Section 505(b)(2) to the Federal
Food, Drug and Cosmetics Act (“FDCA”). Section 505(b)(2) permits the filing of an NDA where at least some of the information
required for approval comes from studies that were not conducted by or for the applicant, and for which the applicant has not received
a right of reference, which could expedite the development program for FMX103 by potentially decreasing the amount of clinical
data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2)
regulatory pathway, we may need to conduct additional clinical trials, provide additional data and information, and meet additional
standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for
FMX103, and complications and risks associated with this product candidate, would likely increase significantly. Moreover, inability
to pursue the Section 505(b)(2) regulatory pathway could result in new competitive products reaching the market more quickly than
our product candidate, which would likely harm our competitive position and prospects. Even if we are allowed to pursue the Section
505(b)(2) regulatory pathway, our product candidate may not receive the requisite approvals for commercialization.
In addition, notwithstanding
the approval of AMZEEQ and certain other products by the FDA under Section 505(b)(2) over the last few years, certain competitors
and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2)
is successfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent
the FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive
and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously
approved drugs that are referenced in a Section 505(b)(2) NDA, and we may be required to certify against patents listed in the
FDA’s Orange Book. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for
up to 30 months depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file
a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing
products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even
if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.
In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway for FMX103, this may not ultimately lead to
faster product development or earlier approval.
Moreover, even if
FMX103 is approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product
may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance
to monitor the safety or efficacy of the products.
Healthcare reforms by governmental
authorities and related reductions in pharmaceutical pricing, reimbursement and coverage by third party payors may adversely affect
our business.
We expect the healthcare
industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare reform, which could
adversely affect third party coverage of our products and how much or under what circumstances healthcare providers will prescribe
or administer our products, if approved.
In both the United
States and other countries, sales of our products, if approved for marketing, will depend in part upon the coverage and adequate
reimbursement from third party payors, which include governmental authorities, managed care organizations and other private health
insurers. Third party payors are increasingly challenging the price and examining the cost effectiveness of medical products and
services.
Increasing expenditures
for healthcare have been the subject of considerable public attention in the United States. Both private and government entities
are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the U.S. healthcare system
have been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription
products and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
Cost reduction initiatives
and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved
products, which in turn would affect the price we can receive for those products. Any reduction in reimbursement that results from
federal legislation or regulation may also result in a similar reduction in payments from private payors, as private payors often
follow Medicare coverage policy and payment limitations in setting their own reimbursement rates.
Significant developments
that may adversely affect pricing in the United States include the enactment of federal healthcare reform laws and regulations,
including the ACA and the Medicare Prescription Drug Improvement and Modernization Act of 2003. Changes in the healthcare system
enacted as part of healthcare reform in the United States, as well as the increased purchasing power of entities that negotiate
on behalf of Medicare, Medicaid, and private sector beneficiaries, may result in increased pricing pressure by influencing, for
instance, the reimbursement policies of third party payors. While healthcare reform legislation may have increased the number of
patients who are expected to have insurance coverage for our product candidates, provisions such as the assessment of a branded
pharmaceutical manufacturer fee and an increase in the amount of rebates that manufacturers pay for coverage of their drugs by
Medicaid programs may have an adverse effect on us. It is uncertain how current and future reforms in these areas will influence
the future of our business operations and financial condition.
Since its enactment, there have been judicial, Congressional
and political challenges to certain aspects of the ACA. For example, President Trump signed two Executive Orders and other directives
designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health
insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or
part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain
taxes under the ACA have been signed into law. In July 2018, CMS published a final rule permitting further collections and payments
to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to
the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14,
2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable
feature of the ACA, and because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well.
On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional and remanded
the case to the lower court to reconsider its earlier invalidation of the full ACA. On January 3, 2020, the U.S. House of Representatives
filed a petition for a writ of certiorari with the U.S. Supreme Court. Pending review, the ACA remains in effect, but it is unclear
at this time what effect the latest ruling and petition will have on the status of the ACA. Although we cannot predict the form
of any such replacement of the ACA may take, if any, or the full effect on our business of the enactment of additional legislation
pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement
for, or restrict coverage of, our products could adversely affect how much or under what circumstances healthcare providers will
prescribe or administer our products. This could materially and adversely affect our business by reducing our ability to generate
revenues, raise capital, obtain additional licensees and market our products. In addition, we believe the increasing emphasis on
managed care in the United States has and will continue to put pressure on the price and usage of pharmaceutical products, which
may adversely impact product sales.
Recently there has
been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has
resulted in several U.S. Congressional inquiries and proposed federal legislation designed to, among other things, bring more transparency
to product pricing, reduce the cost of certain products under Medicare, review the relationship between pricing and manufacturer
patient programs, and reform government program reimbursement methodologies. At the state level, individual states in the United
States are also increasingly passing legislation and implementing regulations designed to control product pricing, including price
or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency
measures.
It is likely that
additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that
federal and state governments will pay for healthcare products and services, which could result in reduced demand for a pharmaceutical
manufacturer’s products or additional pricing pressure.
Legislative or regulatory healthcare
reforms in the United States may make it more difficult and costly for us to obtain regulatory clearance or approval of our product
candidates and to produce, market, and distribute our products after clearance or approval is obtained.
From time to time,
legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory
clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations
and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products.
Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times
of FMX103 or any of our other product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation
or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, inter alia,
require:
|
·
|
changes to manufacturing methods;
|
|
·
|
recall, replacement, or discontinuance of one or more of our products; and
|
|
·
|
additional recordkeeping.
|
Each of these would
likely entail substantial time and cost and could adversely affect our business and our financial results.
We and our contract manufacturers
are subject to significant regulation with respect to manufacturing our product and product candidates. The manufacturing facilities
on which we rely may not continue to meet regulatory requirements and have limited capacity.
We and the contract
manufacturers for our product and product candidates are subject to extensive regulation. Some components of a finished drug product
approved for commercial sale or used in late-stage clinical studies must be manufactured in accordance with cGMP. These regulations
govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems
to control and assure the quality of investigational products and products approved for sale. Poor control of production processes
can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties or stability
of our product and product candidates that may not be detectable in final product testing. We or our contract manufacturers must
supply all necessary documentation in support of regulatory applications on a timely basis and where required, must adhere to the
FDA’s or other regulator’s good laboratory practices and cGMP regulations enforced by the FDA or other regulator through
facilities inspection programs. Our facilities and quality systems and the facilities and quality systems of some or all of our
third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing
approval of our product and potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing
facility involved with the preparation of our products or the associated quality systems for compliance with the regulations applicable
to the activities being conducted. If these facilities do not pass a pre-approval plant inspection, FDA or other marketing approval
of the products may not be granted.
The regulatory authorities
also may, at any time following approval of a product for sale, audit the manufacturing facilities of our third-party contractors.
If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications
or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require
remedial measures that may be costly and/or time-consuming for us or a third party to implement and that may include the temporary
or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a facility. Any such remedial
measures imposed upon us or third parties with whom we contract could materially harm our business.
If we or any of our
third-party manufacturers fail to maintain regulatory compliance, the FDA or other regulators can impose regulatory sanctions including,
among other things, refusal to approve a pending application for a product, or revocation of a pre-existing approval. As a result,
our business, financial condition and results of operations may be materially harmed.
Additionally, if supply
from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. The number of manufacturers
with the necessary manufacturing capabilities is limited. The regulatory agencies may also require additional studies if a new
manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result
in a delay in our desired clinical and commercial timelines.
These factors could cause the delay of
clinical studies, regulatory submissions, required approvals or commercialization of our product and any future products, cause
us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet
contractual requirements and we are unable to secure, validate and obtain approval of one or more replacement suppliers capable
of production at a substantially equivalent cost, our clinical studies may be delayed or we could lose potential revenues.
Changes in funding for the FDA, the
SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new
products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing
normal functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the
FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels,
ability to hire and retain key personnel and accept payment of user fees, and statutory, regulatory, and policy changes. Average
review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government
agencies on which our operations may rely, including those that fund research and development activities is subject to the political
process, which is inherently fluid and unpredictable.
Disruptions at the
FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies,
which would adversely affect our business. For example, over the last several years, including beginning on December 22, 2018,
the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough
critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could
significantly impact the ability of the FDA to timely review and process our regulatory submissions, including the NDA for our
product candidate FMX103 for the treatment of moderate-to-severe papulopustular rosacea in adults, which was accepted for review
in October 2019, and such delays could have a material adverse effect on our business. Further, future government shutdowns could
impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
We are subject to various U.S. and
foreign anti-bribery and anti-corruption laws, and any violations by us of such laws could result in substantial penalties.
The U.S. Foreign Corrupt
Practices Act, or FCPA, and similar worldwide anti-bribery and anti-corruption laws generally prohibit companies and their intermediaries
from offering, making or authorizing improper payments to government officials for the purpose of obtaining or retaining business.
The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring
the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international
subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Our internal
control policies and procedures may not protect us from reckless or negligent acts committed by our employees, future distributors,
licensees or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution
and have a negative impact on our business, results of operations and reputation.
Our business involves the use of
hazardous materials and we and our third party manufacturers and suppliers must comply with environmental laws and regulations,
which can be expensive and restrict how we do business.
Our research and development
activities and our third party subcontractors’ and suppliers’ activities involve the controlled storage, use and disposal
of hazardous materials owned by us, including minocycline and doxycycline, key components of our product candidates, and other
hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture,
storage, handling and disposal of these hazardous materials. We are licensed by the Israeli Ministry of Health to manufacture small
batches of product in topical dose form for our Phase I, II and III clinical trials. In some cases, these hazardous materials are
stored at our and our subcontractors’ facilities pending their use and disposal.
Despite our efforts,
we cannot eliminate the risk of contamination. This could cause an interruption of our commercialization efforts and business operations,
environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage,
handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized
by us and our subcontractors and suppliers for handling and disposing of these materials generally comply with the standards prescribed
by these laws and regulations, this may not be the case and there may be risk of accidental contamination or injury from these
materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and
state or federal or other applicable authorities may curtail our use of certain materials and interrupt our business operations.
Furthermore, environmental
laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such
changes and cannot be certain of our future compliance.
Sanctions and other trade control
laws create the potential for significant liabilities, penalties and reputational harm.
As a company transitioning
to commercialization in the United States and potentially overseas, we may be subject to national laws as well as international
treaties and conventions controlling imports, exports, re-export and diversion of goods, services and technology. These include
import and customs laws, export controls, trade embargoes and economic sanctions, denied party watch lists and anti-boycott measures
(collectively “Customs and Trade Controls”). Applicable Customs and Trade Controls are administered by Israel’s
Ministry of Finance, the U.S. Treasury’s Office of Foreign Assets Control (OFAC), other U.S. agencies and other agencies
of other jurisdictions where we do business. Customs and Trade Controls relate to a number of aspects of our business, including
most notably the sales of finished goods and API as well as the licensing of our intellectual property, as provided above. Compliance
with Customs and Trade Controls has been the subject of increasing focus and activity by regulatory authorities, both in the United
States and elsewhere, in recent years. Although we have policies and procedures designed to address compliance with Customs and
Trade Controls, actions by our employees, by third-party intermediaries (such as distributors and wholesalers) or others acting
on our behalf in violation of relevant laws and regulations may expose us to liability and penalties for violations of Customs
and Trade Controls and accordingly may have a material adverse effect on our reputation and our business, financial condition and
results of operations.
Our license agreement with Cutia
Therapeutics (HK) Limited ("Cutia") exposes us to certain legal and other risks inherent in doing business in China that
could adversely affect our business.
In April 2020, we
entered into a license agreement with Cutia pursuant to which we granted Cutia exclusive rights to obtain regulatory approval of
and commercialize AMZEEQ and FMX103 and FCD105, if and as approved by the FDA, in China, Taiwan, Hong Kong and Macau. Conducting
business in China exposes us to a variety of risks and uncertainties that are unique to China. The economy of China has been transitioning
from a planned economy to a market−oriented economy. Although in recent years the Chinese government has implemented measures
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still
owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industrial
development. It also exercises significant control over China’s economic growth through the allocation of resources, controlling
payment of foreign currency−denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in interruptions
of commercialization efforts in China. In addition, the Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have limited precedential value. Accordingly, we cannot predict
the effect of future developments in the Chinese legal system, including the promulgation of new laws, changes to existing laws
or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. Commercialization efforts
in China could be materially harmed by any changes in the political, legal or economic climate in China or the inability to enforce
applicable Chinese laws and regulations. If such commercialization efforts in China are materially harmed, Cutia may not be able
to successfully commercialize the licensed products in China. Furthermore, the legal regime protecting intellectual property rights
in China is also undergoing changes. Because the Chinese legal system in general, and the intellectual property regime in particular,
are relatively less predictable, it is often challenging to create and enforce intellectual property rights in China. Accordingly,
we may not be able to effectively protect our intellectual property rights in China under the agreement with Cutia.
Risks Related to Our Intellectual
Property
If our efforts to obtain, protect or
enforce our patents and other intellectual property rights related to our launched product AMZEEQ®, to our
Phase III product candidate FMX103 and to our Phase II product candidate FCD105, or any of our other product candidates are not
adequate, we may not be able to compete effectively and we otherwise may be harmed.
Our commercial success depends in part on our ability to obtain
and maintain patent protection and other intellectual property rights and to utilize trade secret protection for our intellectual
property and proprietary technologies, our products and their uses, as well as our ability to operate without infringing upon
the proprietary rights of others. We rely upon a combination of patents, trade secret protection, trademarks, confidentiality
agreements, assignment of invention agreements and other contractual arrangements to protect the intellectual property related
to our launched product AMZEEQ®, to our Phase III product candidate FMX103 and to our Phase II product candidate
FCD105 and to our other development programs. Limitations on the scope of our intellectual property rights may limit our ability
to prevent third parties from designing around such rights and competing against us. For example, our patents in relation to AMZEEQ,
FMX103 and FCD105 do not claim a new compound. Rather, the active pharmaceutical ingredients of AMZEEQ, FMX103 and FCD105 are
existing compounds and our granted patents and pending patent applications are directed to, among other things, novel formulations
of these existing compounds that are dispensed as a foam. Accordingly, other parties may compete with us, for example, by independently
developing or obtaining competing topical formulations that design around our various patent claims, or by using formulations
from expired patents but which may contain the same active ingredients, or by seeking to invalidate our patents. For example,
a third party may develop a competitive product that provides benefits similar to our product or to one of our clinical product
candidates but has a sufficiently different composition to fall outside the scope of our patents. Moreover, any disclosure to
or misappropriation by third parties of our confidential proprietary information, unless we have sufficient regulatory and/or
patent and/or trade secret protection and we are able to enforce such rights successfully, could enable competitors to quickly
duplicate or surpass our technological achievements, eroding our competitive position in our market.
We currently have various granted patents in the United States
related to AMZEEQ and our lead product candidate FMX103, and to our phase II topical combination foam candidate FCD105, which subject
to payments of the appropriate maintenance fees are expected to remain in effect until 2030. We also have an issued patent in the
United States related to AMZEEQ that has an expiry date in September 2037, if the appropriate maintenance fees are paid. These
patents relate to a composition of matter comprising a claim to a formulation of a tetracycline antibiotic, which can include minocycline
or doxycycline, or to a minocycline formulation and therefore, may be less protective than patents that claim a new drug. We also
have granted patents and pending patent applications in a number of foreign jurisdictions with specifications relating to AMZEEQ,
FMX103, or FCD105.
We currently own and have licensed various granted patents related
to serlopitant in the United States. We have a granted patent licensed from Merck with claims in relation to the compound serlopitant
and to a composition of matter comprising serlopitant that is expected to expire in 2025 in the United States, if the appropriate
maintenance fees are paid. Patents from the same family have also been granted in multiple foreign jurisdictions. We have granted
patents in the United States claiming methods-of-use for serlopitant that are expected to expire in 2033 in the United States,
if the appropriate maintenance fees are paid. From this family we also have patents granted, and applications pending in the United
States and in various foreign jurisdictions.
The expiration of our patents will limit our ability to profit
from the commercialization of our product and product candidates as may challenges to our patent claims. Furthermore, any disclosure
to or misappropriation by third parties of our confidential or proprietary information could enable competitors to quickly duplicate
or surpass our technological achievements, thus eroding our competitive position in our market.
As of March 31, 2020, the combined portfolio of the merged company
had over 270 granted patents and several patent applications pending worldwide covering our various topical delivery foam-based
platforms and other technology, including patents in relation to serlopitant and its uses. However, the patent applications that
we own or license may fail to result in granted patents in the U.S. or foreign jurisdictions, or if granted the patent claims may
fail to prevent a potential infringer from marketing its product or be deemed invalid or held unenforceable by a court.
In patent litigation in the United States, defendant counterclaims
alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet
any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability
assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO,
or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability is
unpredictable. With respect to validity, for example, there may be an invalidating prior art, of which we and the patent examiner
were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability against
our intellectual property related to our product or product candidates, we would lose at least part, and perhaps all, of the patent
protection on such product or product candidate. Such a loss of patent protection would have a material adverse impact on our business.
Competitors and others in the fields of pharmaceuticals, systemically-administered,
orally-administered and topically-administered therapies comprising an active ingredient in foam and other presentations have created
a substantial amount of scientific publications, patents and patent applications and other materials relating to their technologies.
Our ability to obtain and maintain valid and enforceable patents depends on various factors, including interpretation of each of
our technologies and the prior art and whether the differences between them allow each of our technologies to be patentable. Patent
applications and patents granted from them are complex, lengthy and highly technical documents that are often prepared under very
limited time constraints and may not be free from errors or words that make their interpretation uncertain. Moreover, the way in
which patents and their claims are interpreted can change as the patent system evolves with new legislation, regulations, practices
and case law and changes can occur in unpredictable ways, which may weaken our ability to obtain new patents or enforce existing
patent claims and patent claims we may obtain in the future. The existence of errors in a patent may have a materially adverse
effect on the patent, its scope and its enforceability. Likewise errors or omission in disclosure may result in the loss of rights.
Our pending patent applications may not issue, or the scope of the claims of patent applications that do issue may be too narrow
or inadequate to protect our competitive advantage. Pending applications may be and have been challenged during prosecution by
the submission of third-party observations or pre-grant oppositions. Such observations may result in the scope of claims being
narrowed or rejected or the application may be refused. Also, our granted patents may be subject to challenges or construed in
a way that may not provide adequate or any protection.
Even if these patents do successfully issue, third parties may
challenge the validity, enforceability or scope of such granted patents or any other granted patents we own or license, which may
result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the European Patent Office
may be opposed by any person within 9 months from the publication of their grant. Also, patents granted by the USPTO, may be subject
to review, reexamination and other challenges. Changes to the U.S. patent laws in 2012 provide additional procedures for third
parties to challenge the validity of patents issuing from patent applications including post-grant review, which generally applies
to patents first filed after March 15, 2013. A post-grant review petition must be filed on or prior to the date which is 9 months
after the patent is granted. The procedures also expand and reform the proceedings for challenging issued patents on grounds of
prior art and publications, also known as inter partes review, or IPR. For patents filed after March 15, 2013, a petition
for IPR may be filed the later of 9 months after grant of the patent or after a post-grant review proceeding on the patent has
terminated. For patents filed prior to March 15, 2013, the rules regarding IPR filing remain unchanged and an IPR petition may
be filed any time following issuance of the patent. As practice and case law of these post grant proceedings continues to evolve
quite quickly their impact can be uncertain.
Furthermore, efforts to enforce our patents could give rise
to challenges to their validity or unenforceability in court proceedings. If the patents and patent applications we hold or pursue
with respect to our launched product AMZEEQ, to FMX103, to FCD105 or any of our other product candidates are challenged, it could
put one or more patents at risk of being invalidated, or interpreted narrowly and threaten our competitive advantage for AMZEEQ,
FMX103, FCD105 or any of our other product candidates. Furthermore, even if they are not challenged, our patents and patent applications
may not adequately protect our products and or product candidates or prevent others from designing around and or challenging our
claims. To meet such challenges, which are part of the risks and uncertainties of developing and marketing product candidates,
we may need to search and evaluate third party intellectual property rights and, if appropriate, to seek licenses for such third
party intellectual property, which may not be available or to challenge such third party intellectual property, which may be costly
and time consuming and may or may not be successful, which could also have a material adverse effect on the commercial potential
for AMZEEQ, FMX103, FCD105 and any of our other product candidates.
If we encounter challenges to our patent claims in relation
to AMZEEQ and we are not ultimately able to defend them the period of time during which we will be able to market AMZEEQ may be
reduced.
Further, if we encounter delays in our clinical trials or in
seeking marketing approval of our product candidates, the period of time during which we could market FMX103, FCD105 or any of
our other product candidates under patent protection could be reduced. Additionally, if we encounter challenges to our patent claims
in relation to any of our clinical trial product candidates and we are not ultimately able to defend them the period of time during
which we will be able to commercialize such product candidates, if marketing approval is received, may be reduced.
Since patent applications in the United States and most
other countries are confidential for a period of time after filing, we cannot be certain that we were the first to (i) file any
patent application related to AMZEEQ, to our Phase III product candidate FMX103 for the treatment of rosacea and to our Phase
II combination product candidate FCD105 for the treatment of acne, or to any of our other product candidates or (ii) conceive
and invent any of the inventions claimed in our patents or patent applications.
For applications filed before March 16, 2013, or patents issuing
from such applications, an interference proceeding can be invoked by a third party, or instituted by the USPTO, to determine who
was the first to invent any of the subject matter covered by the patent claims of our applications and patents. As of March 16,
2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent
when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent
application in the USPTO under the new first-to-file system before we did, could therefore be awarded a patent covering an invention
of ours even if we had made the invention before it was made by the third party.
The change to “first-to-file” from “first-to-invent”
is one of the changes to the patent laws of the U.S. resulting from the Leahy-Smith America Invents Act, or AIA, signed into law
on September 16, 2011. Among some of the other changes to the patent laws are changes that limit where a patentee may file a patent
infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. Until recently, a
lower evidentiary standard was applied in certain USPTO proceedings compared to the evidentiary standard in U.S. federal court
necessary to invalidate a patent claim. Under the new final rule, effective for petitions filed on or after November 13, 2018,
the USPTO Patent Trial and Appeal Board (PTAB) is to apply the same claim construction standard applied by civil courts under 35
USC §282(b) in IPR, post-grant review, and the transitional program for covered business method patents proceedings.
The impact this may have in practice on the use and outcome of USPTO proceedings is uncertain. Because of lower costs and the fact
that USPTO statistics indicate that a high rate of challenged claims are being invalidated in these USPTO procedures, they may
continue to be a popular and effective means of challenging patents.
Even where patent, trade secret and other intellectual property
laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary
rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property
against our competitors could provoke actions or counterclaims against us, and our competitors have intellectual property of their
own, some of which include substantial patent portfolios. An unfavorable outcome could have a material adverse effect on our business
and could result in the challenged patent(s) or one or more claims being interpreted narrowly or invalidated, or held not to
be infringed, or one or more of our patent applications may not be granted.
We also rely on trade secret protection and confidentiality
agreements to protect our know-how, data and information prior to filing patent applications and during the period before they
are published. We additionally rely on trade secret protection and confidentiality agreements to protect proprietary know-how that
we consider may be maintained as a trade secret rather than the subject of a patent application. We further rely on trade secret
protection and confidentiality agreements to protect proprietary know-how that may not be patentable, processes for which patents
may be difficult to obtain or enforce and other elements of our product development processes that involve proprietary know-how,
information or technology that is not covered by patents. We also enter into and rely on, where appropriate, common interest agreements
to protect privileged confidential information.
In an effort to protect our trade secrets and other confidential
information, we incorporate confidentiality provisions in all our employees’ agreements and require our consultants, contractors
and licensees to which we disclose such information to execute confidentiality agreements upon the commencement of their relationships
with us. These agreements require that confidential information, as defined in the agreement and disclosed to the individual by
us during the course of the individual’s relationship with us, be kept confidential and not disclosed to third parties for
an agreed term. These agreements, however, may not provide us with adequate protection against accidental or improper use or disclosure
of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized
use or disclosure of our confidential information. A breach of confidentiality could significantly affect our competitive position
and we could lose our trade secrets or they could become otherwise known or be independently discovered by our competitors. Although
we make efforts to protect our trade secrets and other confidential information we cannot be certain that all parties that gain
access to our proprietary information or who may be involved in the development of our intellectual property have entered into
written confidentiality agreements or that such agreements will be sufficiently protective or that they will not be breached. Also,
to the extent that our employees, consultants or contractors use any intellectual property owned by others in their work for us,
disputes may arise as to the rights in any related or resulting know-how and inventions. Additionally, others may independently
develop the same or substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets
and other confidential information. Any of the foregoing could deteriorate our competitive advantages, undermine the trade secret
and contractual protections afforded to our confidential information and have material adverse effects on our business, as could
breaches of cybersecurity.
Cybersecurity disruptions and breaches
can compromise our intellectual property, proprietary and other information to our detriment and may impact our business operations
if it becomes a target for such activities.
We may be subject to attempted cybersecurity disruptions from
a variety of threat actors. If our systems for protecting against cybersecurity disruptions prove to be insufficient, our employees
or third parties could be adversely affected. Such cybersecurity disruptions and actual breaches could cause damage or destroy
assets, compromise business systems, result in proprietary information, trade secrets and other sensitive information being altered,
lost, stolen, or published and may result in loss of intellectual property and in employee or third-party information being compromised,
or otherwise disrupt business operations. Significant costs to remedy the effects of such a cybersecurity disruption may be incurred
by us, as well as in connection with resulting regulatory actions and litigation, and such disruption may harm relationships with
third parties and impact our business reputation and be advantageous to competitors. In addition, because of the frequently changing
attack techniques, along with the increased volume and sophistication of the attacks, there is the potential for the Company to
be adversely impacted.
Changes in U.S. or foreign patent law and practice could
diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other companies in the markets in which
we participate, our success is heavily dependent on intellectual property, particularly patents. The strength of patents in the
pharmaceutical field involves complex legal and scientific questions and moreover in the United States and in many foreign jurisdictions
patent policy, practice and case law continues to evolve and change and the issuance, scope, validity, enforceability and commercial
value of our patent rights are highly uncertain. This uncertainty includes changes to the patent laws through one or more of legislative
action to change statutory patent law, rule changes and practice directions issued by National Patent Offices, or court action
that may reinterpret, limit or expand on existing law in ways affecting the scope or validity of granted patents. Particularly
in recent years in the United States, there have been several major legislative developments and court decisions that have affected
patent laws and how they are applied in significant ways and there may be more developments in the future that may weaken or undermine
our ability to obtain patents or to enforce our existing and future patents. Additionally, new guidelines are issued by the USPTO
and by the FDA from time to time which can impact patent practice in the pharmaceutical industry in significant ways.
We have agreed to share ownership in certain patents that
may result from our development and license agreements with certain major pharmaceutical companies, which may detract from our
rights to such patents.
We have agreed with several of the pharmaceutical companies
with whom we are developing certain topical products, based on our emulsion foam technology and the licensees’ active ingredients,
to jointly own and have an undivided interest in patents that arise from the relevant projects, where the licensee made its own
material contributions to the invention. In certain agreements, we have further agreed that inventions achieved exclusively or
primarily by the licensees in the course of the development without significant contribution by us will be owned solely by them,
and they will be allowed to file patent applications covering such inventions without our participation.
We have granted certain licensees the right to provide input
during the prosecution of licensed patent applications. We have further granted certain licensees the primary right to enforce
several of our existing patents, which we have licensed to these licensees to allow them to commercialize or continue to commercialize
our jointly-developed product, in the event that any infringement of the licensed patents adversely affects the licensees’
ability to utilize the licenses for the purpose they were granted. Such rights may detract from our rights and title to such patents
and we may as a result have little or no control or say in any proceedings concerning them. In addition, any proceedings against
our technology could impact any or all of our licensees, and we may be considered or found to be contractually responsible for
the payment of certain claims and losses as a result of such impact.
In order to facilitate the development and commercialization
of AMZEEQ and our other clinical product candidates in mainland China, Taiwan, Hong Kong and Macau, we have entered into a license
agreement with Cutia. The license agreement gives Cutia certain rights with respect to inventions generated solely by them or
jointly with Foamix. Subject to the terms of the agreement, in the former case Cutia will own them and shall grant Foamix a license,
and in the latter case they will be jointly owned.
If we infringe or are alleged to infringe or otherwise
violate intellectual property rights of third parties, our business could be harmed.
Our research, development and commercialization activities
may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other
parties. Competitors in the field of topical and oral drugs have developed large portfolios of patents and patent
applications relating to our business. For example, for the treatment of acne or rosacea and other topical indications,
including for the treatment of psoriasis. In particular, there are patents and pending patent applications held by third
parties that relate to formulations with minocycline-based and doxycycline-based products and to methods of treatment with
minocycline-based and doxycycline-based products for indications we are pursuing with AMZEEQ, our Phase III product candidate
FMX103, our Phase II product candidate FCD105 and our other such-based product candidates. There are also patents and pending
patent applications held by third parties that relate to formulations with neurokinin 1 receptor antagonists and to treatment
of pruritus or itch. There may be granted patents with claims that could be asserted against us in relation to such products
or product candidates. There may also be granted patents held by third parties that may be infringed or otherwise violated by
our other product candidates and activities, and we do not know whether or to what extent we may be infringing or otherwise
violating third party patents. There may also be third party patent applications that if approved and granted as patents may
be asserted against us in relation to AMZEEQ, FMX103, FCD105 or any of our other product candidates or activities. Patent
applications can take years to issue and there may be applications that are pending and in the course of prosecution claims
may change or be added and there may be patents and claims of which we are unaware that may later issue with claims that
might be infringed by commercializing a product or product candidate. We may fail to identify applications and granted
patents that may be asserted against us in relation to AMZEEQ, our Phase III product candidates FMX103 and our Phase II
product candidate FCD105 or any of our other product candidates or activities. Searches and analyses undertaken may miss or
not uncover all potential and future threats. These third parties could bring claims against us that would cause us to incur
substantial expenses and, if successful against us, could cause us to pay substantial damages and legal fees. These third
parties could include non-practicing entities that have no relevant products or revenue. Further, if a patent infringement
suit were brought against us, we could be temporarily or permanently enjoined or otherwise forced to stop or delay research,
development, manufacturing or sales of the product or product candidate that is the subject of the suit.
As a result of patent infringement claims, or to avoid potential
claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms,
or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both,
and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual
property, or such rights might be restrictive and limit our present and future activities. Ultimately, we or a licensee 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 are unable to enter into licenses on acceptable terms.
There has been and there currently is substantial litigation
and other proceedings regarding patent and other intellectual property rights in the pharmaceutical industry. In addition to possible
infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference,
derivation, review, re-examination or other post-grant proceedings declared or granted by the USPTO and similar proceedings in
foreign countries, regarding intellectual property rights with respect to our current or any future products. In some jurisdictions,
third party observations or pre-grant oppositions may be filed. A third party may initially sometimes choose to submit exploratory
observations or oppositions in one or more foreign jurisdictions prior to commencing proceedings in the United States, where the
costs could be higher. The cost and burden to us of any patent litigation or other proceeding, even if resolved in our favor, could
be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than
we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant
management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings and their
outcome could impair our ability to compete in the marketplace and impose a substantial financial burden on us. The occurrence
of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
Furthermore, several of our employees were previously employed
at universities or other pharmaceutical companies, including potential competitors. While we take steps to prevent our employees
from using the proprietary information or know-how of others that is not in the public domain or that has not already been independently
developed by us earlier, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed,
confidential information, intellectual property, trade secrets or other proprietary information of any such employee’s former
employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could
result in substantial costs to us or be distracting to our management. If we do not succeed with respect to any such claims, in
addition to paying monetary damages and possible ongoing royalties, we may lose valuable intellectual property rights or personnel.
Obtaining and maintaining our intellectual property protection,
such as patent protection, depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental agencies, such as patent agencies, and our intellectual property protection, such as patent protection,
could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign patent agencies require compliance
with a number of procedural, documentary, fee payment and other provisions to maintain patent applications and issued patents.
Noncompliance with these requirements can result in abandonment or lapse of a patent or patent application, resulting in partial
or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market
earlier than would otherwise have been the case. Similarly, compliance with relevant provisions is required to maintain trademark
applications and registrations, while non-compliance can, likewise, result in loss of rights.
If we are unable to secure registrations and protect our
trademarks from infringement, our business prospects may be harmed.
We own trademarks that identify “Menlo” and “Menlo
Therapeutics” and have submitted applications to register these trademarks in the United States and in various other jurisdictions.
Similarly, we own trademarks that identify “Foamix” and have registered these trademarks in the United States and Israel.
We own the trademarks “AMZEEQ” and “MST” that identify our FDA approved topical product for acne vulgaris
and its delivery technology and we have filed applications for these trademarks in the United States and in some other jurisdictions
including Israel. We also own and have filed applications for trademarks in the United States that represent the logo used in connection
with AMZEEQ, and the proposed logo(s) and commercial name(s) of FMX103. We have not yet selected or submitted trademark applications
for a proposed commercial trade name for FCD105 in the United States or elsewhere and failure to do so and secure registrations
could adversely affect our business.
Applications for trademarks may be rejected during prosecution
and we may be unable to overcome such proceedings or we may have to narrow or limit the scope of the applications or rely on a
lower level of protection provided by common law unregistered trademark rights, if any. Opposition or cancellation proceedings
may be filed against our trademarks, which may not survive such proceedings or we may have to narrow or limit their scope. Foamix’s
applications for the MST trademark in the United States, and in some other jurisdictions are being opposed. As the need
arises suitable steps may be taken to defend our MST trademark and contest these proceedings.
In the US the FDA evaluates and must approve any trademark we
propose to use with products for which we seek regulatory approval regardless of whether we have registered it, or applied to register
it, as a trademark. The FDA review will include an evaluation of potential for confusion with other product names. Selecting a
product trademark can be an expensive process. If the FDA objects to proposed trademarks this could delay regulatory approval and
we may be required to expend significant resources in an effort to identify suitable substitutes that would qualify as a registerable
trademark, not infringe any existing third party trademark rights and be acceptable to the FDA.
Although we take steps to monitor the possible infringement
or misuse of our trademarks, it is possible that third parties may infringe, dilute or otherwise violate our trademark rights.
Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against
third party infringers or violators may be unduly expensive and time-consuming, and the outcome may be an inadequate remedy.
We may become involved in lawsuits to protect or enforce
our patents or other intellectual property or the patents of our licensors, which could be expensive and time-consuming.
Competitors may infringe our intellectual property, including
our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop third party infringement
or unauthorized use. This can be expensive and burdensome, particularly for a company of our size, as well as time-consuming. In
addition, in an infringement proceeding, a court may decide that a patent or certain patent claims of ours are not valid or is
unenforceable, or may refuse to stop the other party from using the technology or method at issue on the grounds that our patent
claims do not cover its technology or method or that the factors necessary to grant an injunction against an infringer are not
satisfied.
We have received notice letters of ANDAs submitted for
drug products that are generic versions of Finacea foam and we have been involved in lawsuits to protect and enforce our patents,
and while we have now settled all these lawsuits we may in the future be involved in other lawsuits to protect and enforce our
patents, for example, if we receive new notice letters of submission of an ANDA to the FDA seeking approval to manufacture and
sell a generic version of a product with Orange Book listed patents.
Foamix is the owner of patents that have been licensed to LEO
Pharma to market Finacea foam, a topical prescription medicine used to treat the inflammatory papules and pustules of mild
to moderate rosacea. Paragraph IV Certification Notice letters directed against several of our U.S. patents listed in the FDA’s
Orange Book for Finacea foam were received respectively from an affiliate of Teva Pharmaceutical Industries Ltd., from affiliates
of Perrigo Company plc. and from Taro Pharmaceuticals Industries Ltd. and its affiliate Taro Pharmaceuticals U.S.A.,
Inc. In each case a Complaint was timely filed with the U.S. District Court for the District of Delaware, asserting, among other
things, that each company had infringed our patents, as listed in its Paragraph IV Notice Letters, by seeking FDA approval to manufacture
and sell a generic version of Finacea foam prior to expiration of these patents. These lawsuits were respectively settled
in October 2019, April 2019 and recently in March 2020 to conclude the litigation relating to Finacea foam. Details of the
settlement agreements are confidential.
Finacea foam uses a different foam technology platform than
Menlo’s recently approved product AMZEEQ (minocycline) topical foam, 4% for the treatment of inflammatory lesions of non-nodular
moderate to severe acne vulgaris in patients 9 years of age and older. AMZEEQ and our clinical product candidates FMX103, and
FCD105, are supported by different patents than those listed in the Orange Book for Finacea foam.
In order to list our patents in the FDA’s Orange Book
application must be submitted timely to the FDA. If we fail to do so for any of our listable patents we will have lost the right
in respect of such patents to obtain a 30 month stay under the Hatch-Waxman Act, and preclude the ANDA filer from receiving final
FDA approval of a generic version, unless a court enters judgment that the patents are invalid or not infringed.
Competitors may infringe our patents. To counter infringement
or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and may be unsuccessful
in whole or part. The infringing party may deny any infringement or challenge the patents or one or more claims as invalid or unenforceable.
Litigation proceedings may also fail, and even if successful, they may result in substantial costs and distraction of our management
and other employees.
Although the litigation has now settled, a future supply issue
and or substitution of Finacea® in favor of generic versions has the potential to have a negative impact on future commercialization
of Finacea and to result in a loss of license revenue. Furthermore, in any infringement proceeding, a court may decide that
a patent of ours, or one or more claims of such patent, is not valid or is unenforceable, or may refuse to stop the other party
from using the supposedly infringing technology on the grounds that our patents, or one or more claims of such patents, do not
cover such technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk
of being invalidated or interpreted narrowly and could also put one or more of our pending patent applications at risk of not issuing.
Our product candidates may be subject to the same risks.
We have also entered into license agreements with other commercial
partners for the development and commercialization of products with active ingredients other than azelaic acid that license one
or more of the patents listed in the FDA’s Orange Book for Finacea® foam, or a family member thereof. While these license
agreements are not considered material to our main business, an adverse result may put at risk the development and commercialization
of any of these licensed products.
An adverse determination of any litigation or other proceedings
could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications
at risk of not issuing.
Interference, derivation review, or other proceedings brought
at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent applications
or those of our licensors or licensees. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by
third parties. Even if we are successful in any proceedings (domestic or foreign, litigation or USPTO or foreign patent office
or other proceedings) they may result in substantial costs and distraction to our management. Moreover, proceedings may be appealed
and obtaining a final resolution can take a long time and substantial resources. We may not be able, alone or with our licensors
or licensees, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such
rights as fully as in the U.S.
Furthermore, because of the substantial amount and extent of
discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of
this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim
proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market
price for our common stock could be significantly harmed and this may be so even if the results are not considered material.
We may not obtain intellectual property rights or otherwise
be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates
in all or most countries throughout the world would be prohibitively expensive. We primarily file patent applications in the United
States and may file in some other selected jurisdictions on a case-by-case basis. As a result, our intellectual property rights
in countries outside the United States are generally significantly less extensive than those in the United States. In addition,
the laws of some foreign countries and jurisdictions, particularly of certain developing countries and jurisdictions, do not protect
intellectual property rights to the same extent as federal and state laws in the United States, and these countries and jurisdictions
may limit the scope of what can be claimed, and in some cases may even force us to grant a compulsory license to competitors or
other third parties. Consequently, we may not be able to prevent third parties from practicing our inventions outside the United
States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors
may use our technologies in jurisdictions where we have not sought or obtained patent protection to develop their own products
and further, may export otherwise infringing products to territories where we have patent protection, but protection and enforcement
is not as strong or effective as that in the United States. These products may compete with our products and our patents or other
intellectual property rights may not be effective or sufficient to prevent them from competing. Moreover, competitors or others
may raise legal challenges to our intellectual property rights or may infringe upon our intellectual property rights, including
through means that may be difficult to prevent or detect.
Many companies have encountered significant problems in protecting
and defending intellectual property rights in foreign jurisdictions. In some foreign jurisdictions the patent system, for example,
may not allow certain types of claims that are acceptable in the United States or may only accept claims of a narrower scope. The
legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other
intellectual property protection, especially those relating to pharmaceuticals, which could make it difficult for us to stop the
infringement of our patents or of other intellectual property protection, misappropriation of intellectual property rights, or
marketing of competing products in violation of our proprietary rights generally. For example, some foreign countries have compulsory
licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability
of patents against third parties, including government agencies or government contractors. In such countries, patents may provide
limited or no benefit. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and
divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted
narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims or issue proceedings
against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be
commercially meaningful. Further, third parties may prevail in their claims against us, which could potentially result in the award
of injunctions or substantial damages against us. Accordingly, our efforts to enforce our intellectual property rights around the
world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
In addition, our ability
to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and foreign
intellectual property laws and practice.
If we breach our license agreement
for serlopitant, we could lose the ability to monetize the asset. Merck also retains rights to serlopitant in specific fields.
In December 2012,
we entered into a license agreement with Merck to obtain exclusive worldwide rights to research, develop, manufacture, market and
sell serlopitant, other than for the treatment or prevention of nausea and vomiting. This agreement requires us to make timely
milestone payments, provide certain information regarding our activities with respect to such products, maintain the confidentiality
of information we receive from Merck and indemnify Merck with respect to our development and commercialization activities under
the terms of the agreement.
If we fail to meet
these obligations, Merck has the right to terminate our exclusive license and upon the effective date of such termination, has
the right to re-obtain the licensed technology as well as aspects of any intellectual property controlled by us and developed during
the period the agreement was in force that relate to the licensed technology. This means that Merck could effectively take control
of the development and commercialization of serlopitant after an uncured, material breach of our license agreement by us. This
would also be the case if we voluntarily terminate the agreement. While we would expect to exercise all rights and remedies available
to us, including seeking to cure any breach by us, and otherwise seek to preserve our rights under the patents licensed to us,
we may not be able to do so in a timely manner, at an acceptable cost or at all. Any uncured, material breach under the license
could result in our loss of exclusive rights and may lead to a complete termination of our product development and any commercialization
efforts for serlopitant.
Merck could also develop
serlopitant for treatment of nausea or vomiting or license these rights to a third party. Development of serlopitant in other fields
could increase the possibility of identification of adverse safety results that impact the development of serlopitant for various
conditions.
Under applicable employment laws,
we may not be able to enforce covenants not to compete.
We generally enter
into non-competition agreements as part of our employment agreements with our employees. These agreements generally prohibit our
employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited
period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may
be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed
while working for us.
For example, Israeli
labor courts place emphasis on freedom of employment and have required employers seeking to enforce non-compete undertakings of
a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material
interests of the employer which have been recognized by the courts, such as the protection of a company’s trade secrets or
other intellectual property.
Risks Related to Our Common Stock and
Our Status as a Public Company
An active public market for our
common stock may not be sustained.
Although
our common stock is quoted on the Nasdaq Global Market, an active trading market for our common stock may not be sustained. The
lack of an active market may impair the ability of holders of our common stock to sell their shares at the time they wish to sell
them or at a price that they consider reasonable. The lack of an active market may also reduce the fair market value of our common
stock, and may cause the trading price of our common stock to be more volatile. The lack of an active market may contribute
to volatility of our stock price, impair our ability to raise capital and may impair our ability to acquire other businesses, applications
or technologies using our shares as consideration.
The trading price of the shares
of our common stock is volatile, and stockholders could incur substantial losses.
Our stock price is volatile.
The stock market in general, and the market for biopharmaceutical companies in particular, have experienced extreme volatility
that has often been unrelated to the operating performance of particular companies. As a result of this volatility, stockholders
may not be able to sell their common stock at or above the price paid for the shares. In addition, in the past, stockholders have
initiated class action lawsuits against pharmaceutical and biotechnology companies, including us, following periods of volatility
in the market prices of these companies’ common stock. If we are subject to future lawsuits we would be subject to additional
risks as described in “We may become subject to lawsuits that could have a material adverse impact on our business, results
of operations and financial condition” above. The market price for our common stock may be influenced by many factors,
including:
|
·
|
our ability to successfully commercialize AMZEEQ in the United States;
|
|
·
|
the status and cost of our marketing commitments for AMZEEQ;
|
|
·
|
delays between our expenditures to develop and market new or enhanced
products and the generation of sales from those products;
|
|
·
|
the success or failure of our licensees to develop, obtain approval
for and commercialize our licensed products, for which we are entitled to contingent payments and royalties;
|
|
·
|
announcement of technological innovations or new products by us;
|
|
·
|
market acceptance of our products;
|
|
·
|
development of technological innovations or new competitive products
by others;
|
|
·
|
announcement of clinical trial results or any other clinical data
results we announce;
|
|
·
|
the commencement or enrollment of our ongoing clinical trials or any
future clinical trials we may conduct, or changes in the development status of FMX103;
|
|
·
|
announcements of clinical trials results by competitors;
|
|
·
|
adverse results from, delays in or termination of clinical trials;
|
|
·
|
any delay in our regulatory filings and any adverse development or
perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without
limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;
|
|
·
|
adverse regulatory decisions, including failure to receive regulatory
approval of FMX103;
|
|
·
|
the filing of ANDAs by generic companies seeking approval to market
generic versions of our products and of our licensee’s products;
|
|
·
|
failure to achieve a publicly announced milestone;
|
|
·
|
unanticipated serious safety concerns related to the use of our products;
|
|
·
|
changes in financial estimates by us or by any securities analysts
who might cover our stock;
|
|
·
|
future capital raising transactions;
|
|
·
|
conditions or trends in our industry;
|
|
·
|
changes in the market valuations of similar companies;
|
|
·
|
stock market price and volume fluctuations of comparable companies
and, in particular, those that operate in the biopharmaceutical industry;
|
|
·
|
publication of research reports about us or our industry or positive
or negative recommendations or withdrawal of research coverage by securities analysts;
|
|
·
|
announcements by us or our competitors of significant acquisitions,
strategic partnerships or divestitures;
|
|
·
|
announcements of investigations or regulatory scrutiny of our operations
or lawsuits filed against us;
|
|
·
|
investors’ general perception of our company and our business;
|
|
·
|
recruitment or departure of key personnel;
|
|
·
|
overall performance of the equity markets;
|
|
·
|
trading volume of our common stock;
|
|
·
|
disputes or other developments relating to proprietary rights, including
patents, litigation matters and our ability to obtain patent protection for our technologies;
|
|
·
|
significant lawsuits, including patent or stockholder litigation;
|
|
·
|
the loss of or failure to obtain material intellectual property rights;
|
|
·
|
our sale or proposed sale, or the sale by our significant stockholders,
of our common stock or other securities in the future;
|
|
·
|
the impact of COVID-19 or of another pandemic or epidemic on our business
and the broader economy as a whole;
|
|
·
|
general political and economic conditions; and
|
|
·
|
other events or factors, many of which are beyond our control.
|
Consequently, the current market price
of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an
investment in our common stock.
If we fail to
maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be
impaired.
We
are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act and the rules and regulations
of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting. We must perform system and process evaluation and testing of our internal control over
financial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our
Form 10-K filing each year, as required by Section 404 of the Sarbanes-Oxley Act. This requires that we incur substantial additional
professional fees and internal costs within our accounting and finance functions and that we expend significant management efforts.
We
may identify weaknesses in our system of internal financial and accounting controls and procedures that could result in a material
misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and
all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and
instances of fraud will be detected.
If
we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable
to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If
that were to happen, the market price of our stock could decline, and we could be subject to sanctions or investigations by the
stock exchange on which our common stock is listed, the SEC, or other regulatory authorities.
If equity research analysts do
not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stock price
and trading volume could decline.
The trading market for our common stock
may be influenced by the research and reports that equity research analysts publish about us and our business. We do not have any
control over the analysts, or the content and opinions included in their reports. The price of our stock could decline if one or
more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research
analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which in
turn could cause our stock price or trading volume to decline. If our operating results fail to meet the forecast of analysts,
our stock price will likely decline.
Sales of a substantial number
of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.
Sales of a substantial number of shares
of our common stock in the public market could occur at any time. These sales, or the perception in the market that our directors,
officers or holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Moreover,
certain holders of shares of our common stock have rights, subject to certain conditions, to require us to file registration statements
covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
We have registered and intend to continue to register all shares of common stock that we may issue under our equity compensation
plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations
applicable to affiliates.
Provisions in our corporate charter
documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts
to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.
Our amended and restated certificate of
incorporation and amended and restated bylaws contain provisions that could delay or prevent changes in control or changes in our
management without the consent of our board of directors. These provisions include the following:
|
·
|
a classified board of directors with three-year staggered terms, which
may delay the ability of stockholders to change the membership of a majority of our board of directors;
|
|
·
|
no cumulative voting in the election of directors, which limits the
ability of minority stockholders to elect director candidates;
|
|
·
|
the exclusive right of our board of directors to elect a director
to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which
prevents stockholders from being able to fill vacancies on our board of directors;
|
|
·
|
the ability of our board of directors to authorize the issuance of
shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights,
without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
|
|
·
|
the ability of our board of directors to alter our bylaws without
obtaining stockholder approval;
|
|
·
|
the required approval of at least 66 2/3% of the shares entitled to
vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate
of incorporation regarding the election and removal of directors;
|
|
·
|
a prohibition on stockholder action by written consent, which forces
stockholder action to be taken at an annual or special meeting of our stockholders;
|
|
·
|
the requirement that a special meeting of stockholders may be called
only by the chief executive officer or the president or the board of directors, which may delay the ability of our stockholders
to force consideration of a proposal or to take action, including the removal of directors; and
|
|
·
|
advance notice procedures that stockholders must comply with in order
to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which
may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate
of directors or otherwise attempting to obtain control of us.
|
In addition, these provisions would apply
even if we were to receive an offer that some stockholders may consider beneficial.
We are also subject to the anti-takeover
provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not,
in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the
stock for three years or, among other exceptions, the board of directors has approved the transaction.
Claims for indemnification by
our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the
amount of money available to us.
Our amended and restated certificate of
incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest
extent permitted by Delaware law.
In addition, as permitted by Section 145
of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements that we have entered
into with our directors and officers provide that:
|
·
|
We indemnify our directors and officers for serving us in those capacities
or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides
that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe such person’s conduct was unlawful.
|
|
·
|
We may, in our discretion, indemnify employees and agents in those
circumstances where indemnification is permitted by applicable law.
|
|
·
|
We are required to advance expenses, as incurred, to our directors
and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances
if it is ultimately determined that such person is not entitled to indemnification.
|
|
·
|
We will not be obligated pursuant to our amended and restated bylaws
to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect
to proceedings authorized by our board of directors or brought to enforce a right to indemnification.
|
|
·
|
The rights conferred in our amended and restated bylaws are not exclusive,
and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain
insurance to indemnify such persons.
|
|
·
|
We may not retroactively amend our amended and restated bylaw provisions
to reduce our indemnification obligations to directors, officers, employees and agents.
|
Our amended and restated certificate
of incorporation and our amended and restated bylaws contain exclusive forum selection clauses, which could limit our stockholders’
ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of
incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or
proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising
pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated
bylaws, any action to interpret, apply, enforce, or determine the validity of our amended and restated certificate of incorporation
or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine.
In addition, our amended and restated bylaws provide that unless we consent in writing to the selection of an alternative forum,
the federal district courts of the United States is the exclusive forum for resolving any complaint asserting a cause of action
arising under the Securities Act of 1933, as amended, against us, our officers, directors, employees or underwriters. These choice
of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes
with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers
and other employees.
Alternatively, if a court were to find
the choice of forum provision contained in our amended and restated certificate of incorporation or our amended and restated bylaws
to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other
jurisdictions, which could adversely affect our business and financial condition.
We do not currently intend to
pay dividends on our common stock, and, consequently, our stockholders’ ability to achieve a return on their investment will
depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash
dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our
growth. Therefore, stockholders are not likely to receive any dividends on their common stock for the foreseeable future. Since
we do not intend to pay dividends, stockholders’ ability to receive a return on their investment will depend on any future
appreciation in the market value of our common stock. Our common stock may not appreciate or even maintain the price at which our
holders have purchased it.
We are an “emerging growth
company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies,
our common stock may be less attractive to investors.
We are an “emerging growth company”
as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of some of the
exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including:
|
·
|
not being required to comply with the auditor attestation requirements
in the assessment of our internal control over financial reporting;
|
|
·
|
not being required to comply with any requirement that may be adopted
by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s
report providing additional information about the audit and the financial statements;
|
|
·
|
reduced disclosure obligations regarding executive compensation in
our periodic reports, proxy statements and registration statements; and
|
|
·
|
not being required to hold a nonbinding advisory vote on executive
compensation and shareholder approval of any golden parachute payments not previously approved.
|
Decreased disclosures in our Securities
and Exchange Commission, or SEC, filings due to our status as an emerging growth company may make it harder for investors to analyze
our results of operations and financial prospects. Investors may find our common stock less attractive as a result of our reliance
on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market
for our common stock and our share price may be more volatile.
We may take advantage of these reporting
exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) December
31, 2023, (2) the last day of the fiscal year (a) in which we have total annual gross revenue of at least $1.07 billion,
or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held
by non-affiliates exceeds $700 million as of the prior June 30th, or (3) the date on which we have issued more than
$1.0 billion in non-convertible debt during the prior three-year period.
Under Section 107(b) of the JOBS Act,
emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private
companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore,
we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We incur significant costs and
demands upon management as a result of being a public company.
As a public company listed in the United
States, we incur significant additional legal, accounting and other costs, as compared to the costs we incurred as a private company.
These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating
to corporate governance and public disclosure, including regulations implemented by the SEC and the Nasdaq Stock Market, LLC, may
increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards
are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. We may experience significantly increased general and administrative expenses and
a diversion of management’s time and attention from our primary business operations if we are required to invest significant
resources to comply with new and evolving laws, regulations and standards. If notwithstanding our efforts to comply with new laws,
regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business
may be harmed.
Failure to comply with these rules might
also make it more difficult for us to obtain some types of insurance, including director and officer liability insurance, and we
might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve
on our board of directors, on committees of our board of directors or as members of senior management.
We might not be able to utilize
a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.
As of December 31, 2019, we had federal and state net operating
loss carryforwards of $165.8 million and $17.6 million, respectively. $44.3 million and $16.8 million of these carryforwards
will begin to expire in 2031 for federal and state purposes, respectively. As of December 31, 2019, we had federal and state research
and development tax credit carryforwards of $7.1 million and $2.1 million, respectively. The federal credits begin to expire in
2031 and the California research credits have no expiration dates. These net operating loss and tax credit carryforwards could
expire unused and be unavailable if we do not generate sufficient taxable income prior to their expiration. In addition, under
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation
undergoes an “ownership change” (generally defined as a greater than 50 percentage point change, by value, in its equity
ownership by significant stockholders over a three-year period) the corporation’s ability to use its pre-change net operating
loss carryforwards and other pre-change tax attributes to offset its post-change income or tax liability may be limited. We have
not determined if we have experienced Section 382 ownership changes in the past and if a portion of our net operating loss
and tax credit carryforwards are subject to an annual limitation under Sections 382 or 383. We may have experienced ownership
changes in the past, including in connection to our IPO and the Merger, and we may experience ownership changes in the future as
a result of subsequent shifts in our stock ownership, some of which may be outside of our control. As a result, even if we earn
net taxable income, our ability to use the net operating loss and tax credit carryforwards may be materially limited, which could
harm our future operating results by effectively increasing our future tax obligations.
Item 5. Other Information.
The description of the Company’s business has been updated
as set forth below to reflect the consummation of the Merger with Foamix on March 9, 2020 and the results of the Phase 3 clinical
trials evaluating the safety and efficacy of once daily oral serlopitant for the treatment of pruritus associated with prurigo
nodularis.
Overview
We
are a biopharmaceutical company focused on the development and commercialization of innovative therapies in dermatology. On
March 9, 2020, we combined with Foamix. In January 2020, Foamix (now
our wholly-owned subsidiary) launched AMZEEQ® (minocycline) topical foam, 4%, a once-daily topical antibiotic for
the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older. AMZEEQ
is the first topical minocycline approved by the FDA for any condition and serves as a springboard for commercializing additional
innovative products in dermatology.
AMZEEQ utilizes our proprietary Molecule
Stabilizing Technology (MST)™ that is also being used to develop our product candidate FMX103 (minocycline) topical foam,
1.5%, for the potential treatment of papulopustular rosacea in adults, and our product candidate FCD105, a topical foam comprising
minocycline and adapalene for the potential treatment of acne vulgaris. FMX103 for papulopustular rosacea is currently being reviewed
by the U.S. FDA with a Prescription Drug User Fee Action (“PDUFA”) action date of June 2, 2020. FCD105 is currently
in Phase 2 clinical trials with top line results anticipated in the second quarter of 2020. Pending a successful development program,
we intend to file an NDA for FCD105 under the abbreviated FDA 505(b)(2) regulatory pathway, which is the same regulatory pathway
we have pursued for AMZEEQ and are pursuing for FMX103.
In addition to MST™, we have a number
of proprietary delivery platforms in development that enable topical delivery of other APIs, each having unique pharmacological
features and characteristics designed to keep the API stable when delivered and directed to the target site. We believe our MST
vehicle and other topical delivery platforms may offer significant advantages over alternative delivery options and are suitable
for multiple application sites across a range of conditions. We are also actively pursuing opportunities to out-license our product
and product candidates to third parties for development and commercialization outside the United States. For example, in April
2020, we entered into a license agreement with Cutia Therapeutics (HK) Limited, a company organized and existing under the laws
of Hong Kong (“Cutia”), pursuant to which we granted Cutia a license to obtain regulatory approval of and commercialize
our minocycline products in Greater China in exchange for an upfront payment of $10 million and quarterly royalties on net sales.
See “—Development and License Agreements—Cutia License for Minocycline Products.”
Prior to the Merger, the Company was focused
on the development and commercialization of serlopitant for pruritic conditions. Following the receipt of the results of the Phase
3 clinical trials evaluating serlopitant for the treatment of PN and the impact of the COVID-19 pandemic, we have revised our operating
plan to focus on the commercialization of AMZEEQ and our other topical minocycline product candidates, and we intend to seek partnering
opportunities, if any, for the development of serlopitant in psoriasis and other indications. In addition, the revised operating
plan reflects prudent resource prioritization and allocation management, including the rationalization of research and development
spend to focus on existing product candidates.
The Merger was structured as a
reverse merger. Although Menlo was the legal acquirer, following the consummation of the Merger and the conversion of the
contingent stock rights issued to Foamix shareholders, Foamix shareholders control approximately 82% of the shares of Menlo
common stock and Foamix was deemed the acquirer for all practical purposes. Our combined company is managed by the Foamix
management team, led by David Domzalski, and headquartered in Bridgewater, NJ.
Our Product Candidates and
Pipeline
The following chart provides a developmental
summary of our product and key product candidates:
AMZEEQ for moderate-to-severe acne
FDA approval and clinical
trial history
On October 18, 2019, the FDA approved our
first drug product, AMZEEQ (4% minocycline foam) formerly known as FMX101, a once-daily novel topical antibiotic foam formulation
of minocycline for the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of
age and older. AMZEEQ is the first topical minocycline to be approved by the FDA for any condition. We launched AMZEEQ in January
2020 for prescribing nationwide.
In 2018, we completed our third pivotal
Phase III clinical trial (Study FX2017-22) for AMZEEQ and announced that we received positive top-line results from this trial
in the third quarter of 2018. In January 2018, we announced the completion of a long-term safety study that was an extension of
our two initial Phase III clinical trials for AMZEEQ. The results from the long-term safety study showed AMZEEQ to be well-tolerated
and to have an acceptable safety profile. Following the successful outcomes in our Phase III clinical trial, on December 21, 2018,
we announced the submission of an NDA for AMZEEQ.
We initiated a third Phase III trial for
AMZEEQ (Study FX2017-22) following our announcement in March 2017 of results from our two initial Phase III clinical trials for
AMZEEQ. In the previous Phase III clinical trials, statistical significance was observed in both co-primary efficacy endpoints
in one study (Study FX2014-05); however, in the other study (Study FX2014-04), statistical significance was demonstrated in only
one of the co-primary efficacy endpoints. Statistical significance was also demonstrated for AMZEEQ compared to vehicle in the
pooled analysis of the co-primary endpoints as well as key secondary endpoints for Studies FX2014-04 and FX2014-05. Study FX2017-22
was initiated following a Type B meeting conducted with the FDA in June 2017. During this meeting, we confirmed that achieving
statistically significant results for AMZEEQ versus vehicle in both co-primary efficacy endpoints in a third independent clinical
trial could be sufficient for establishing an efficacy claim in an NDA submission.
Market opportunity
Acne is characterized by areas of scaly
red skin, non-inflammatory blackheads and whiteheads, inflammatory lesions, papules and pustules and occasionally boils and scarring.
It affects approximately 40 to 50 million people in the United States alone, of whom approximately 10 million suffer from moderate-to-severe
acne. For most people, acne diminishes over time and tends to disappear or decrease by age 25. However, some individuals continue
to suffer from acne well into their 30s, 40s and later.
The current U.S. market size for treatment
of acne is considerable and estimated at approximately $3 billion, presenting significant unmet needs of patients and healthcare
providers to be addressed. We believe that AMZEEQ may provide a new treatment alternative for patients and healthcare providers
who are unsatisfied with their current therapies.
Limitations of oral minocycline
for acne
Oral minocycline, such as Solodyn, has
been widely prescribed for the treatment of moderate-to-severe acne. According to the product label of Solodyn, inflammatory lesions
were reduced by 44% at week 12, and a positive effect on the reduction of non-inflammatory acne lesions versus vehicle was not
demonstrated. According to its product label, the most common adverse systemic side effects of Solodyn include diarrhea, dizziness,
drowsiness, indigestion, lightheadedness, loss of appetite, nausea, sore mouth, throat or tongue and vomiting.
In 2009, the FDA added oral minocycline
to its Adverse Event Reporting System, a list of medications under investigation by the FDA, due to its severe side effects. In
2011, we conducted a blind survey of 40 U.S. dermatologists. The results of the survey revealed that 90% of the dermatologists
surveyed who prescribed oral minocycline were concerned about its side effects, and 76% of these dermatologists stated they would
prefer prescribing a topical minocycline product over an existing oral medication, assuming the topical treatment was safe, effective
and approved by the FDA.
FMX103 for papulopustular
rosacea
Overview and new drug
application
Our product candidate FMX103 (minocycline)
foam, 1.5%, is a novel topical foam formulation of minocycline for the treatment of papulopustular rosacea in adults. In November
2018, we announced that both of our Phase III clinical trials for FMX103 (Studies FX2016-11 and FX2016-12) met each of their co-primary
endpoints, demonstrating a statistically significant reduction in inflammatory lesion counts and IGA treatment success, as assessed
by IGA scores of approximately 50% from baseline. There were very few reported adverse events and no treatment-related serious
adverse events observed in these Phase III clinical trials, as well as in the 40-week open label safety extension (Study FX2016-13)
that was completed in February 2019.
On August 5, 2019, we announced the submission
of an NDA for FMX103, which was accepted by the FDA on October 16, 2019, with a targeted PDUFA action date of June 2, 2020. We
cannot provide any assurances or predict with any certainty the schedule for which we will receive approval for FMX103, if at all.
Market opportunity
Papulopustular rosacea is a chronic skin
disease causing inflammatory lesions (papules and pustules) on the face. It can create psychosocial burdens, such as embarrassment,
anxiety and low self-esteem that adversely affect quality of life. Rosacea is most frequently seen in adults between 30 and 50
years of age and affects more than 16 million people in the United States alone. There is no known cure for rosacea and the exact
root cause of the disease remains unknown as well, though both genetic and environmental factors are thought to have an impact
on its outbreak. Mild papulopustular rosacea is currently treated by topical antimicrobials (such as metronidazole, clindamycin
and ivermectin) or azelaic acid, while the mainstays for the treatment of moderate-to-severe rosacea are systemic antibiotics such
as minocycline and doxycycline.
The current U.S. market size for treatment
of rosacea in adults is estimated to be approximately $1 billion, and we believe that our FMX103 product candidate for this indication,
if approved, may provide a new treatment alternative for patients and healthcare providers who are unsatisfied with their current
therapies.
FMX103 clinical trials
FMX103 Phase III clinical
trials
In December 2016, we conducted a pre-IND
meeting with the FDA to confirm that our clinical and non-clinical programs outlined were sufficient to submit an IND and to begin
our Phase III clinical trials, utilizing the results of toxicology, pharmacology and human safety studies that were completed for
FMX101.
In June 2017, we announced that the first
patient had been dosed in our Phase III program to evaluate the efficacy and safety of our topical minocycline foam 1.5% FMX103
for the treatment of moderate-to-severe rosacea. The Phase III program consisted of two multi-center trials (referred to as Studies
FX2016-11 and FX2016-12), implementing protocols and endpoints in accordance with the FDA’s guidance as provided in the pre-IND
meeting.
Studies
FX2016-11 and FX2016-12 were identical, double-blind, randomized, vehicle-controlled studies that enrolled a total of 1,522 patients
(Study FX2016-11: 751 patients, Study FX2016-12: 771 patients) with moderate-to-severe papulopustular rosacea across 100 sites
in the United States. Patients were randomized 2:1 (1.5% minocycline foam versus vehicle) into
a 12-week double-blind phase where they were treated once daily with either FMX103 minocycline foam (1.5%) or the respective vehicle
foam. The co-primary efficacy endpoints were: (a) the dichotomized IGA score where treatment success is defined as at least
a 2-step improvement resulting in a 0 (clear) or 1 (almost clear) score at week 12 compared to baseline, and (b) the absolute change
in the inflammatory lesion count at week 12 compared to baseline.
In
November 2018, we announced positive topline results from these two Phase III clinical trials for FMX103.
In Study FX2016-11, the mean inflammatory
lesion count at baseline was 28.5 and 29.0 for the FMX103 and vehicle treatment groups, respectively, and the proportion of patients
with an IGA score at baseline of 3 (“moderate”) or 4 (“severe”) was 89.7% and 10.3%, respectively, in the
FMX103 treatment group, and 86.7% and 13.3%, respectively, in the vehicle treatment group. The co-primary efficacy assessment showed
a statistically significant mean reduction in inflammatory lesion count at week 12 relative to baseline of -17.57 lesions for the
FMX103 treatment group and -15.65 lesions for the vehicle treatment group. In addition, in respect of the second co-primary endpoint,
the proportion of subjects that achieved IGA treatment success at week 12 was 52.1% for the FMX103 treatment group and 43.0% for
the vehicle treatment group.
In Study FX2016-12, the mean inflammatory
lesion count at baseline was 30.0 and 30.2 for the FMX103 and vehicle treatment groups, respectively, and the proportion of patients
with an IGA score at baseline of 3 (“moderate”) or 4 (“severe”) was 86.2% and 13.8%, respectively, in the
FMX103 treatment group, and 82.9% and 17.1%, respectively, in the vehicle treatment group. The co-primary efficacy assessment showed
a statistically significant mean reduction in inflammatory lesion count at week 12 relative to baseline of -18.54 lesions for the
FMX103 treatment group and -14.88 lesions for the vehicle treatment group. In addition, in respect of the second co-primary endpoint,
the proportion of subjects that achieved IGA treatment success at week 12 was 49.1% for the FMX103 treatment group and 39.0% for
the vehicle treatment group.
The following chart show the reduction
of inflammatory lesion count from baseline for FMX103 and vehicle treatment groups in each of Studies FX2016-11 and FX2016-12 at
week 12:
The following chart show the percentage
of patients who met the IGA treatment success criterion at week 12 (defined as at least a 2 grade point reduction from baseline
IGA score and a final score of “clear” (0) or “almost clear” (1)) for FMX103 and vehicle treatment groups
in each of Studies FX2016-11 and FX2016-12 at week 12:
The
safety and tolerability of FMX103 were also evaluated. The most commonly reported adverse events in the clinical trials related
to upper respiratory tract infections. There were no treatment-related serious adverse events. FMX103 was observed in the clinical
trials to have a generally favorable safety profile and appeared to be generally well tolerated. Based on the efficacy and safety
profile observed in clinical studies to date, we believe FMX103, if approved, may present an attractive option for the treatment
of moderate-to-severe papulopustular rosacea.
Studies
FX2016-11 and FX2016-12 were followed by study FX2016-13 (Study FX2016-13), a 40-week, open-label safety extension study to evaluate
the long-term safety of FMX103. The open-label safety study enrolled a total of 505 patients, all of whom had completed 12 weeks
of FMX103 or vehicle treatment in the preceding double-blind studies (FX2016-11 or FX2016-12). Patients continued for up to an
additional 40 weeks of open-label treatment with FMX103. A total of 465 patients received FMX103 therapy for at least 26 weeks
and 272 patients received FMX103 therapy for a total of 52 weeks. A total of 410 patients completed participation in the study.
The key safety findings from the study were as follows:
|
·
|
Non-cutaneous adverse events were comparable in type and frequency
with those reported during the double-blinded portion of FX2016-11 and FX2016-12. The most frequently reported treatment-emergent
adverse event was upper respiratory tract infection, or the common cold (3.8%). 4 patients discontinued the study due to a non-application
site adverse event – mydriasis, anaemia/leukocytosis, appendicitis and enchondromatosis. No serious drug-related adverse
events were reported.
|
|
·
|
Cutaneous adverse events occurred in 1% or less of patients during
the additional 40 weeks of open-label treatment with FMX103 with the most frequently reported treatment emergent adverse event
being contact dermatitis (1.0%). Two patients discontinued in the study for an application site adverse event – worsening
of rosacea and contact dermatitis. In the assessment of facial dermal tolerability at Week 52, more than 95% of patients had “none”
or “mild” signs and symptoms (burning/stinging, flushing/blushing, dryness, itching, peeling and hyperpigmentation).
The severity of key clinical manifestations of rosacea - erythema and telangiectasia - had both improved when compared to baseline
of the preceding double-blind studies.
|
|
·
|
Subject satisfaction with FMX103 treatment remained high when re-assessed
at Week 52, which was consistent with scores obtained at Week 12 (end of double-blind studies).
|
Open
label efficacy was also assessed throughout the 40-week FMX103 treatment course. The key efficacy findings from the study were:
|
·
|
Mean absolute reduction of inflammatory lesion count when compared
to baseline of the preceding double-blinded study (FX2016-11 or FX2016-12) was -23.0 for subjects treated with FMX103 for 52 weeks
and –22.5 for subjects treated for 40 weeks. Corresponding mean inflammatory lesion counts at baseline of the preceding double-blind
studies for these groups were 28.8 and 28.7 respectively (all observed cases).
|
|
·
|
The proportion of subjects achieving IGA treatment success at Week
52 defined as at least a 2-step improvement resulting in a 0 (clear) or 1 (almost clear) score compared to baseline of the preceding
double-blinded study (FX2016-11 or FX2016-12) was 81.6% for subjects treated with FMX103 for 52 weeks and 76.0% for subjects treated
for 40 weeks (all observed cases).
|
FMX103 Phase II clinical
trials
We initiated Studies FX2016-11 and FX2016-12,
as described above, following positive top-line results from our Phase II clinical trial for FMX103, announced in the third quarter
of 2016. The double-blind, randomized, vehicle-controlled Phase II clinical trial was conducted in 18 sites in Germany and included
233 patients with moderate-to-severe rosacea who were randomized to receive either one of two doses of FMX103 minocycline foam
(3% or 1.5%) or vehicle foam once daily over 12 weeks, followed up by a four-week post-treatment evaluation. The efficacy endpoints
were identical to those of Studies FX2016-11 and FX2016-12. Safety and tolerability were also evaluated in the Phase II clinical
trial. At week 12, statistically significant results were observed in the reduction of inflammatory lesions (papules and pustules)
versus vehicle in both the 1.5% and 3% doses of FMX103. The trial further showed a statistically significant improvement in IGA
scores. FMX103 also appeared to be generally well-tolerated, with no report of serious adverse events or drug related systemic
adverse events. A few patients overall exhibited treatment-related dermal adverse events and four of them consequently discontinued
the trial.
FCD105 for moderate-to-severe
acne vulgaris
Overview
Our product candidate FCD105 (minocycline
3% and adapalene 0.3%) is our proprietary novel topical combination foam formulation of minocycline and adapalene minocycline for
the treatment of moderate-to-severe acne vulgaris.
FCD105 combines the bacteriostatic and
anti-inflammatory properties of minocycline with the third-generation retinoid, adapalene, which acts in regulating the differentiation
of follicular epithelial cells. Oral minocycline and topical adapalene products are approved for use in the treatment of acne vulgaris
in the United States, with the latter available in combination and as monotherapy. Pending a successful development program, we
intend to file an NDA for FCD105 under the FDA 505(b)(2) regulatory pathway, which is the same regulatory pathway we have pursued
for AMZEEQ and are pursuing for FMX103.
Market opportunity
For information about the market opportunity
for alternative treatments for acne vulgaris, please see “—AMZEEQ for moderate-to-severe acne—Market opportunity.”
We believe that our FCD105 product candidate for this indication, if approved, may provide a new treatment alternative for patients
and healthcare providers who are unsatisfied with their current therapies, alongside AMZEEQ and as a complementary product.
Limitations of oral minocycline
for acne
For information about the limitations of
oral minocycline for acne, please see “—AMZEEQ for moderate-to-severe acne—Limitations of oral minocycline for
acne.”
FCD105 clinical trials
On September 19, 2019, we announced that
the first patient had been enrolled in our Phase II clinical trial (Study FX2016-40) to evaluate the efficacy and safety of FCD105.
Our Phase II clinical trial will be conducted as a double-blind, vehicle-controlled trial at multiple sites throughout the United
States and is expected to enroll approximately 400 patients aged 12 years and older with moderate-to-severe acne vulgaris. Patients
will be randomized to one of four groups: FCD105 foam, 0.3% adapalene foam, 3% minocycline foam or vehicle foam, and will be asked
to self-apply their assigned treatment once daily for 12 weeks. The trial design follows current regulatory standards in evaluating
the safety and efficacy of combination products of this type. In November 2019, we announced that enrollment had been completed
and we expect topline data from this Phase II clinical trial to be available in the second quarter of 2020.
Serlopitant for Pruritus
Prior to the Merger, Menlo focused on the
development and commercialization of serlopitant for the treatment of pruritus, or itch, associated with various conditions, such
as prurigo nodularis and psoriasis. Serlopitant is a highly selective small molecule inhibitor of the neurokinin 1 receptor, or
NK1-R, given as a once-daily, oral tablet. On April 6, 2020, we announced that our Phase 3 clinical trials evaluating the safety
and efficacy of once daily oral serlopitant for the treatment of pruritus associated with prurigo nodularis (study MTI-105 and
study MTI-106) did not meet their respective primary endpoint of demonstrating statistically significant reduction in pruritus
in patients treated with serlopitant compared to placebo based upon a 4-point improvement responder analysis. Following the receipt
of such results, other than to assess and explore opportunities, if any, to license out and or monetize other aspects of the serlopitant
asset, the Company has decided to discontinue the development of serlopitant.
Manufacturing
We do not own or operate manufacturing
facilities for the production of AMZEEQ or any of our product candidates. We currently contract with third parties for all of our
required raw materials, active pharmaceutical ingredients (API) and finished products for our preclinical research and clinical
trials for our product candidates. We currently rely on third party contract manufacturers for all of our required raw materials,
active ingredients and finished products for our preclinical research and clinical trials for our product candidates and for the
supply of finished product for commercial use. We currently have no plans to establish our own manufacturing capabilities and plan
to continue to rely on third-party manufacturers for any future trials of our product candidates and commercialization of our products.
We, together with our contract manufacturing
organizations, or CMOs, have developed the validation processes, methods, tests and/or controls suitable for commercial scale manufacturing
of our various product candidates and for defining their properties. Changes in manufacturing scale or the manufacturer may require
changes to processes, methods, tests and or controls, which may take time to develop, validate and implement.
On October 21, 2019, we entered into a
Contract Manufacturing and Supply Agreement and subsequently, a Quality Agreement, with ASM Aerosol-Service AG, or ASM, pursuant
to which ASM will exclusively manufacture and supply AMZEEQ and FMX103, if approved, for a specified price per can of product.
Pursuant to the agreement, ASM has agreed to manufacture and supply all of our commercial needs for AMZEEQ and FMX103, if approved,
on an exclusive basis for a period of four years, subject to certain exceptions. We are not required to purchase a minimum amount
of the products under the ASM agreement. In addition, ASM will not be permitted to manufacture or supply to a third party any topical
product containing minocycline or minocycline hydrochloride during the term of the ASM agreement and for two years after the termination
or expiration of the ASM agreement. We also have supply agreements in place for the commercial supply of the drug substance minocycline
hydrochloride, which is contained in our products and product candidates. We currently have a development contract and quality
agreement in place with one CMO for the manufacturing of FCD105 for our clinical trials.
Development stage and commercial quantities
of any products that we develop need to be manufactured in facilities, and by processes, that comply with the requirements of the
FDA and the regulatory agencies of other jurisdictions in which we seek approval. We require all of our CMOs to comply with these
requirements and currently employ internal and external resources to manage our manufacturing contractors. The relevant manufacturers
of our drug products for commercial production, and product candidates for our current preclinical and clinical trials, have advised
us that they are compliant with both the FDA’s Good Laboratory Practices, or GLP, and cGMP.
AMZEEQ, and our product candidates if approved,
may not be able to be produced in sufficient commercial quantities, in compliance with regulatory requirements or at an acceptable
cost. We and our contract manufacturers are, and will be, subject to extensive governmental regulation in connection with the manufacture
of any pharmaceutical products or medical device constituent components. We and our contract manufacturers must ensure that all
of the processes, methods and equipment are compliant with cGMP and the FDA’s GLP for drugs on an ongoing basis, as mandated
by the FDA and foreign regulatory authorities, and conduct extensive audits of vendors, contract laboratories and suppliers.
Commercialization
We have a commercial infrastructure to
support the sales of AMZEEQ and our product candidates, including FMX103 and FCD105, if approved, in the United States, and intend
to partner with third parties outside the United States to launch our products in other geographic territories or therapeutic classes.
Our commercial sales force specifically targets dermatologists and other healthcare practitioners who diagnose and manage dermatologic
conditions. We also deploy marketing and targeting efforts using data analytics and consumer outreach vehicles that we believe
are underutilized. Our sales force is supported by a centralized, internal team who will direct and manage our marketing and sales
efforts, and coordinate market access and payor relationships as well as manage the supply chain. In order to support AMZEEQ, and
our product candidates if approved, we expect to continue to invest significant financial and management resources to continue
to build and support our commercial operations.
As part of our commercialization infrastructure,
we also have an internal sales, marketing, market access and distribution infrastructure. Market research, data analysis and strategic
launch planning have been conducted on AMZEEQ and on our near-to-market product portfolio. We have established the market strategy
for AMZEEQ, physician targeting models, and portfolio strategies to capitalize on infrastructure synergies. We are currently developing
the market entry planning and comprehensive portfolio commercial plans for FMX103.
Additionally, continuous efforts are deployed
to identify unmet needs in the dermatology market, assess their commercial potential and advise on the prioritization of the development
of our future product candidates accordingly.
Development and License Agreements
Parallel to the development of our product
candidates, we have entered into development and license agreements with various pharmaceutical companies, including LEO Pharma
A/S, or LEO, Mylan N.V. and Actavis plc, combining our emulsion-based foam technology with drugs selected by the licensee to create
new product offerings for patients. Each license agreement entitles us to service payments, contingent payments and royalties from
sales of any new products that are commercialized. Each agreement is exclusive only to the specific drug that is licensed, leaving
us the rights to commercialize and develop products with other drugs for the same indications using our proprietary foam technology
while also allowing the licensee to apply the new products to any indication with its specific drug.
Cutia License for Minocycline Products
On April 21, 2020, our wholly owned subsidiary,
Foamix, entered into a License Agreement (the “Cutia License Agreement”) with Cutia. Pursuant to the Cutia License
Agreement, Foamix granted Cutia an exclusive license to obtain regulatory approval of and commercialize AMZEEQ®
in mainland China, Taiwan, Hong Kong and Macau (each a “Region” and collectively, the “Territory”). In
addition, Cutia has been granted an exclusive license to obtain regulatory approval of and commercialize FMX103 and FCD105 (together
with AMZEEQ®, the “Licensed Products”) in the Territory if and as approved by the FDA in the United
States. Foamix has agreed to supply the finished Licensed Products to Cutia for clinical and commercial use at an agreed price.
Foamix will receive an upfront cash payment
of $10.0 million. Foamix will be entitled to receive an additional $1.0 million following the first regulatory approval of any
of the Licensed Products by the National Medical Product Administration of the People’s Republic of China. In addition, Foamix
will be entitled to receive a royalty on net sales of the Licensed Products in the Territory each quarter. The royalties will be
payable on a Licensed Product-by-Licensed Product and Region-by-Region basis and will be paid until the later of (i) ten years
from the date of first commercial sale of such Licensed Product in such Region and (ii) the expiration of the last claim of a Foamix
patent covering such Licensed Product in such Region.
Foamix may terminate the Cutia License
Agreement if, among other things, Cutia challenges the validity, enforceability or scope of any Foamix licensed patent in respect
of the Licensed Products in a litigation or other court proceeding, subject to certain exceptions. Cutia may terminate the Cutia
License Agreement at any time upon 90 days’ prior written notice. In addition, Cutia may terminate the Cutia License Agreement
if a regulatory authority in the Territory has ordered Cutia to stop all sales of Licensed Products in the Territory due to a safety
concern, subject to certain exceptions. The Cutia License Agreement also contains representations and warranties customary for
this type of agreement, including with respect to intellectual property rights.
LEO Pharma A/S for Finacea®
Foam
In September 2015, Bayer HealthCare AG,
or Bayer, began selling in the United States a product branded Finacea®, based on our foam technology. Finacea is a prescription
topical drug which was developed through a collaboration between Bayer and Foamix. It is the first prescription product developed
using our proprietary technology that has been approved by the FDA for sale in the United States. Bayer listed in the Orange Book
several patents that were licensed from us in connection with the development of Finacea. According to our initial license agreement
with Bayer, we are entitled to receive royalties and certain contingent payments upon the commercialization of Finacea. On
September 4, 2018, LEO acquired Finacea from Bayer. As part of the acquisition, our license agreement with Bayer with respect to
Finacea was assigned to LEO. LEO has assumed all of the rights and responsibilities of Bayer under the license agreement as it
relates to Finacea, including the payment of royalties to us and rights and obligations related to patent litigation matters.
In
April 2019, our partner, LEO, informed us that the batches of API intended for use in Finacea and produced by a contract manufacturer
had failed to meet the required specifications for the finished product. As a result, LEO has been unable to manufacture the Finacea
product for sale, which, in turn, has stopped the royalty payments from LEO to us since that time. LEO has recently informed us
that it has remedied its supply issues and has resumed commercial sales in the United States. This supply chain issue for Finacea
was unrelated to our manufacturing, production or supply of AMZEEQ, FMX103, FCD105 or any of our other product candidates.
In 2019, we received (or became entitled to receive) a total of $0.4 million in royalties from sales of Finacea from LEO.
Together with LEO, we recently resolved
litigation against Taro, and comes after the settlements in October 2019 with Teva and in April 2019 with Perrigo, for
their alleged infringement of certain of our patents following their submission of an ANDA to the FDA seeking approval to manufacture
and sell a generic version of Finacea. This settlement concludes the litigation relating to Finacea Foam. See also “Risk
Factors—Risks Related to Our Intellectual Property—We have received notice letters of ANDAs submitted for drug products
that are generic versions of Finacea foam and we have been involved in lawsuits to protect and enforce our patents, and while we
have now settled all these lawsuits we may in the future be involved in other lawsuits to protect and enforce our patents, for
example, if we receive new notice letters of submission of an ANDA to the FDA seeking approval to manufacture and sell a generic
version of a product with Orange Book listed patents.”
Merck License for Serlopitant
We license serlopitant from Merck. In December
2012, we entered into a license agreement with Merck for exclusive worldwide royalty free rights for the development and commercialization
of serlopitant and two other NK1 R antagonists in all human diseases, disorders or conditions, except for in the field of treatment
or prevention of nausea or vomiting, which was retained by Merck. We paid Merck an upfront licensing fee of $1.0 million and issued
to Merck an aggregate of 1,243,168 shares of our common stock. In addition, we have agreed to make aggregate payments of up to
$25.0 million upon the achievement of specified development and regulatory milestones for serlopitant. Furthermore, if we choose
to pursue the development of any other non-serlopitant product pursuant to this agreement, we may owe up to an aggregate of $50.0
million of additional payments upon the achievement of specified development and regulatory milestones. In 2018, upon dosing our
first patient in our Phase 3 clinical trial for serlopitant for the treatment of pruritus associated with PN, we paid a milestone
payment of $3.0 million to Merck. We are responsible for the prosecution and enforcement of patents licensed under the agreement.
The agreement contains customary representations, warranties, and indemnities, and terminates on the date of achievement of all
of milestones set forth in the agreement, after which our licenses become fully paid and perpetual. Each party may also terminate
the agreement for material breach by the other party or for certain bankruptcy or insolvency related events, and we may terminate
the agreement without cause at any time upon advance written notice to Merck.
Additional Research and Development
In addition to AMZEEQ for the treatment
of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older, FMX103 for the treatment
of papulopustular rosacea in adults, FCD105 for the treatment of moderate-to-severe acne vulgaris and licensed products resulting
from our development and license agreements with various pharmaceutical companies, we are developing product candidates for various
indications to which we own worldwide rights, and which are based on formulations and adaptations of our patented, versatile foam
platforms or other dosage forms and or new technology.
We intend to selectively proceed into clinical
trials with these formulations under the FDA’s 505(b)(2) regulatory pathway wherever necessary to expedite FDA approval,
and according to our identification of unmet needs and potential market opportunities.
Foamix’s research and development
expenses totaled $51.2 million, $64.5 million and $57.8 million in 2019, 2018 and 2017, respectively, and Menlo’s research
and development expenses totaled $53.8 million, $53.0 million and $29.0 million in 2019, 2018 and 2017, respectively. In the ordinary
course of business, we enter into agreements with third parties such as contract research organizations, or CROs, medical institutions,
clinical investigators and contract laboratories, to conduct our clinical trials and aspects of our research and preclinical testing.
These CROs and other third parties provide us with project management, monitoring, regulatory consulting and investigative services,
and their fees are part of our research and development expenses.
Intellectual Property –
our Product and Pipeline Clinical Trial Product Candidates
Our intellectual property and proprietary
technology are essential to the development, manufacture, and sale of AMZEEQ, FMX103, FCD105 and our clinical stage future pipeline
product candidates. We are committed to protecting our intellectual property rights, core technologies and other know-how, through
a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, common interest agreements
to protect privileged confidential information, licenses, assignments of invention and other contractual arrangements with our
employees, scientific advisors, consultants, partners, suppliers, customers and others. Such agreements may however be breached,
and we may not have adequate remedies for any breach. In addition, our trade secrets and other proprietary and confidential information
may otherwise become known or be independently discovered by competitors. To the extent that our employees, scientific advisors,
consultants, partners or other contractors use intellectual property owned by others in their work for us, disputes may arise as
to the rights in related or resulting know how and inventions. Additionally, we rely on our research and development program, clinical
trials, know-how and marketing and distribution programs to advance our products.
Our commercial success will also depend
at least in part on not infringing the proprietary rights of third parties. It is uncertain whether the issuance of any third party
patent would require us to alter our development or commercial strategies, alter our drugs or processes, obtain licenses or cease
certain activities. Our breach of any license agreements or failure to obtain a license to proprietary rights that we may require
to develop or commercialize our future drugs may have a material adverse impact on us. If third parties prepare and file patent
applications in the United States that also claim technology to which we have rights, we may have to participate in interference
or other proceedings in the United States Patent and Trademark Office, or USPTO, to determine priority of invention.
As of March 31, 2020, the combined portfolio
of the merged company had a patent portfolio of over 270 granted patents in certain countries worldwide, including over 90 granted
patents in the United States. Additionally, as of March 31, 2020, we had several pending patent applications worldwide, of which
over 30 are pending in the United States, describing and claiming our various foam-based platforms and other technology including
patents and applications in relation to serlopitant, its uses and compositions. Our other patents granted in the United States
relate to various foam platforms, such as emulsion foam, hydrophobic foam, hydro-alcoholic foam, and aqueous foam and to other
technology.
AMZEEQ and FMX103
Our most important patents are various
U.S. patents relating to AMZEEQ and our lead product candidate FMX103, and to our phase II topical combination foam candidate FCD105,
which subject to payments of the appropriate maintenance fees, are expected to remain in effect until 2030. We also have a recently
issued patent in the United States related to AMZEEQ that has an expiry date in September 2037, if the appropriate maintenance
fees are paid. These patents relate to a composition of matter comprising a claim to a formulation of a tetracycline antibiotic,
which can include minocycline or doxycycline, or to a minocycline formulation and therefore, may be less protective than patents
that claim a new drug. We also have granted patents and pending patent applications in a number of foreign jurisdictions with specifications
relating to AMZEEQ, FMX103, or FCD105.
AMZEEQ, FMX103 and FCD105 are based on a different foam technology platforms and are supported by different patents than those listed
in the Orange Book for the foam technology used in Finacea foam.
Serlopitant
We currently own and have licensed various
granted patents related to serlopitant in the United States. We have a granted patent licensed from Merck with claims in relation
to the compound serlopitant and to a composition of matter comprising serlopitant that is expected to expire in 2025 in the United
States, if the appropriate maintenance fees are paid. Patent applications in the same family were also filed internationally and
patents have been granted in multiple foreign jurisdictions. We additionally have granted patents in the United States claiming
methods-of-use for serlopitant that are expected to expire in 2033 in the United States, if the appropriate maintenance fees are
paid. From this family we also have patents granted in several foreign jurisdictions and patent applications pending in the United
States and in various foreign jurisdictions.
Additional patent term of up to five years
may potentially be awarded in the United States for one of the serlopitant U.S. patents as a result of the patent term extension
provision of the Hatch Waxman Act, if regulatory approval of serlopitant is obtained. Further, depending on national laws in certain
foreign jurisdictions, an extension of patent term may also potentially be available if regulatory approval of serlopitant is obtained
in those countries. For example, a supplementary protection certificate, if obtained in Europe, can provide up to a maximum five
years of market exclusivity. Likewise, in Japan, the term of a patent may be extended by a maximum of five years in certain circumstances.
Competition
The medical and pharmaceutical industries
in which we operate are intensely competitive and subject to significant technological change and changes in practice. While we
believe that our innovative technology, knowledge, experience and resources provide us with competitive advantages, we may face
competition from many different sources with respect to AMZEEQ, our Phase III product candidate FMX103, and our other pipeline
products or any product candidates that we may seek to develop or commercialize in the future. Possible competitors may include
pharmaceutical companies, academic and medical institutions, governmental agencies and public and private research institutions.
These prospective competitors have the ability to effectively discover, develop, test and obtain regulatory approvals for products
that compete with ours, as well as the ability to effectively commercialize, market and promote approved products, including communicating
the effectiveness, safety and value of products to actual and prospective customers and medical staff.
Currently marketed products that could
compete with AMZEEQ include: (i) oral products such as Solodyn (minocycline, Bausch Health), Doryx (doxycycline, Mayne Pharmaceuticals),
Targadox (doxycycline, Journey), Acticlate (docycycline, Almirall), Seysara (sarecycline, Almirall) and (ii) topical products such
as Epiduo (adapalene + BPO, Galderma), Aczone (dapsone, Almirall), Retin-A (tretinoin, Bausch Health), Onexton-Acanya (clindamycin
+ BPO, Bausch Health) and Tazorac (tazarotene, Almirall).
Currently marketed products that may compete
with our FMX103 product candidate include: (i) branded and generic oral products containing minocycline, Oracea (doxycycline, Galderma)
and (ii) topical products such as all forms of metrogel/metronidazole available as a branded or generic product, Soolantra (ivermectin,
Galderma) and Finacea (azaleic acid, LEO).
In addition, new products are currently
being developed that may compete with AMZEEQ and our FMX103 product candidate, if approved, including: generic versions of any
of the above on-marketed products and, specifically for acne: Altreno (tretinoin, Ortho Derm), Seysara (sarecycline, Almirall).
In September 2019, Hovione Farmaciencia SA, a private company, announced details of its planned Minocycline Against Rosacea Study,
Phase 3 development program for the treatment of moderate to severe inflammatory rosacea with HY01, a 3% topical gel suspension
containing minocycline non-hydrochloride. In January 2020, BioPharmX Corporation entered into a Merger Agreement with Timber
Pharmaceuticals LLC and intends to “evaluate BioPharmX's Phase 3 ready proprietary topical minocycline gel programs.”
This product has previously been studied by BioPharmX in the treatment of inflammatory lesions of acne vulgaris and papulopustular
rosacea. In 2019, Sol-Gel completed Phase III studies for EPSOLAY (microencapsulated benzoyl peroxide cream, 5%) for
inflammatory lesions of rosacea, and for TWYNEO (microencapsulated benzoyl peroxide, 3% and microencapsulated tretinoin, 0.1%)
for acne vulgaris. If ultimately approved and launched in the United States, these product candidates, and others that may
be in development, could be direct competitors to AMZEEQ and FMX103.
Further, we are developing certain topical
products with various licensees combining our proprietary technology with a drug selected by the licensee. While the licenses we
grant are exclusive with respect to the specific drug which is licensed, our agreements with these licensees allow them to commercialize
the licensed developed products for any topical dermatological application, not just for the specific indication for which each
product was originally intended. If any such licensed product proves to be effective for moderate-to severe acne, rosacea or any
other indication that we are pursuing with AMZEEQ, FMX103, FCD105 or our other product candidates, we may face competition from
these licensees. Although these products would be based on a different foam technology than the technology platforms used in our
in-house minocycline-based products, such licensed products may nevertheless pose a competitive challenge, as they will have the
benefit of our foam technology coupled with the licensees’ potentially greater resources, experience and brand recognition,
extensive marketing channels and other capabilities, and possibly the advantage of entering the market before us.
Government Regulation
Our business is subject to extensive government
regulation. Regulation by governmental authorities in the United States and other jurisdictions is a significant factor in the
development, manufacture and marketing of our foam delivered treatments and in our ongoing research and development activities.
Product approval process
in the United States
Review and approval of
drugs
In the United States, the FDA regulates
drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA and implementing regulations. In general, new drug products require
the submission of an NDA and approval thereof by the FDA prior to being marketed in the United States. The process of obtaining
regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations
requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at
any time during the product development process, approval process or after approval may subject an applicant to a variety of administrative
or judicial sanctions and enforcement actions brought by the FDA, the Department of Justice or other governmental entities. Possible
sanctions may include the FDA’s refusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold,
issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions,
fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties.
The process required by the FDA prior to
marketing and distributing a new drug product in the United States generally involves the following:
|
·
|
completion of laboratory tests, animal studies and formulation studies
in compliance with the FDA’s GLP, or other applicable regulations;
|
|
·
|
submission to the FDA of an application for an investigational new
drug application, or IND, which must become effective before human clinical trials may begin;
|
|
·
|
approval by an independent institutional review board, or IRB, at
each clinical site before each trial may be initiated at that site;
|
|
·
|
performance of adequate and well-controlled human clinical trials
in accordance with good clinical practice, or GCP, requirements to establish the safety and efficacy of the proposed drug for its
intended use;
|
|
·
|
preparation and submission to the FDA of an NDA or supplemental NDA;
|
|
·
|
satisfactory completion of an FDA advisory committee review, if applicable;
|
|
·
|
satisfactory completion of one or more FDA inspections of the manufacturing
facility or facilities at which the product or components thereof are produced, to assess compliance with current Good Manufacturing
Good Practices, or cGMP, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity,
strength, quality and purity;
|
|
·
|
satisfactory completion of FDA audits of clinical trial sites and the sponsor’s clinical
trial records to assure compliance with GCPs and the integrity of the clinical data;
|
|
·
|
payment of user fees and FDA review and approval of the NDA; and
|
|
·
|
compliance with any post-approval requirements, including the potential
requirement to implement a Risk Evaluation and Mitigation Strategy, or REMS, and the potential requirement to conduct post-approval
studies.
|
Preclinical studies
Preclinical studies include laboratory
evaluation, as well as animal studies to assess the potential safety and efficacy of the product candidate. Preclinical safety
tests must be conducted in compliance with the FDA’s GLP regulations. The results of the preclinical tests, together with
manufacturing information and analytical data, are submitted to the FDA as part of an IND which must become effective before clinical
trials may be commenced.
Clinical trials in support
of an NDA
Clinical trials involve the administration
of an investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements,
which include, among other things, the requirement that all research subjects provide their informed consent in writing before
their participation in any clinical trial. Clinical trials are conducted under written trial protocols detailing, among other things,
the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A
protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. An IND
becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed
clinical trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding
concerns before the clinical trial can begin.
In addition, an IRB representing each institution
participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution,
and the IRB must conduct continuing review and reapprove the trial at least annually. The IRB must review and approve, among other
things, the trial protocol and informed consent information to be provided to trial subjects. An IRB must operate in compliance
with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes
of Health for public dissemination on their ClinicalTrials.gov website.
Clinical trials are typically conducted
in three sequential phases, which, in some cases, may overlap or be combined:
|
Phase I:
|
The drug is initially introduced into healthy human
subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution,
excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.
|
|
Phase II:
|
The drug is administered to a limited patient population
to identify possible short-term adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific
targeted diseases and to determine dosage tolerance and optimal dosage.
|
|
Phase III:
|
The drug is administered to an expanded patient
population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough
data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile
of the product, and to provide adequate information for the labeling of the product.
|
Submission of an NDA
to the FDA
The results of the preclinical studies
and clinical trials, together with other detailed information, including information on the manufacture, control and composition
of the product, are submitted to the FDA as part of an NDA requesting approval to market the product candidate for a proposed indication.
Under the PDUFA, as amended, applicants are required to pay fees to the FDA for reviewing an NDA. These user fees, as well as the
annual fees required for commercial manufacturing establishments and for approved products, can be substantial. Each NDA submitted
to the FDA for approval is reviewed for administrative completeness and reviewability within 60 days following submission of the
application. If found complete, the FDA will “file” the NDA, thus triggering a full review of the application. The
FDA may refuse to file any NDA that it deems incomplete or not properly reviewable at the time of submission.
Once the submission is accepted for filing,
the FDA begins an in-depth substantive review. The FDA has agreed to certain performance goals in the review of NDAs. Most applications
for standard review drug products are reviewed within ten to twelve months; most NDAs for priority review drugs are reviewed in
six to eight months. The review process for both standard and priority review may be extended by FDA for three additional months
to consider certain late-submitted information, or information intended to clarify information already provided in the submission.
The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which
it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality
and purity.
Before approving an NDA, the FDA may inspect
the facilities at which the product is manufactured or facilities that are significantly involved in the product development and
distribution process, and will not approve the product unless cGMP compliance is satisfactory at such facilities. The FDA may deny
approval of an NDA if applicable statutory or regulatory criteria are not satisfied, or it may require additional testing or information,
which can delay the approval process. FDA approval of any application may include many delays or may never be granted. If a product
is approved, the approval will specify the indicated uses for which the product may be marketed in the United States pursuant to
that NDA, may require that warning statements be included in the product labeling, may require that additional studies or trials
be conducted following approval as a condition of the approval, may impose restrictions and conditions on product distribution,
prescribing or dispensing in the form of risk evaluation and mitigation strategies (REMS), or may impose other limitations. After
evaluating the NDA and all related information, including any advisory committee recommendation, if any, and inspection reports
regarding the manufacturing facilities and clinical trial sites, the FDA will issue an approval letter or a complete response letter.
A complete response letter generally outlines the deficiencies in the submission and contains a statement of specific conditions
that must be met in order to secure final approval of the NDA and may require additional clinical or non-clinical testing in a
resubmission to the NDA in order for the FDA to reconsider the application. FDA has committed to reviewing such submissions in
two or six months depending on the type of information included in the resubmission. Even with submission of this additional information,
the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions
have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial
marketing of the drug with specific prescribing information for specific indications.
Even if the FDA approves a product, it
may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included
in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess
a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization,
or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which
can materially affect the potential market and profitability of the product.
Once a product is approved, marketing the
product for other indicated uses or making certain manufacturing or other changes requires FDA review and approval of a supplemental
NDA or a new NDA, which may require additional clinical data and review fees. In addition, further post-marketing testing and surveillance
to monitor the safety or efficacy of a product may be required. Also, product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if safety or manufacturing problems occur at any time following approval. In addition, new government
requirements may be established that could delay or prevent regulatory approval of our product candidates under development.
Special FDA Expedited
Review and Approval Programs
The FDA has various programs, including
Fast Track designation, Breakthrough Therapy designation, Accelerated Approval, and Priority Review, which are intended to expedite
or simplify the process for the development and FDA review of drugs that are intended for the treatment of serious or life-threatening
diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide
important new drugs to patients earlier than under standard FDA review procedures.
Under the fast track program, the sponsor
of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a fast track drug concurrent
with, or after, the filing of the IND for the drug candidate. Fast track designation provides opportunities for frequent interactions
with the FDA review team to expedite development and review of the product. FDA may initiate review of sections of a fast track
drug’s NDA before the application is complete. This rolling review is available if the applicant provides, and FDA approves,
a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, FDA’s time
period goal for reviewing an application does not begin until the last section of the NDA is submitted.
In addition, a sponsor can request breakthrough
therapy designation for a drug if it 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 eligible for intensive guidance from FDA on an efficient drug development program,
organizational commitment to the development and review of the product including involvement of senior managers, and, like fast
track products, are also eligible for rolling review of the NDA. Both fast track and breakthrough therapy products are also eligible
for accelerated approval and/or priority review, if relevant criteria are met.
Under the FDA’s accelerated approval
regulations, the FDA may approve a drug for a serious or life-threatening illness that provides meaningful therapeutic benefit
to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or
on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict
an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence
of the condition and the availability or lack of alternative treatments.
In clinical trials, a surrogate endpoint
is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient
feels, functions, or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A
drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of
Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval
studies, or confirm a clinical benefit during post-marketing studies, will allow FDA to withdraw the drug from the market on an
expedited basis. All promotional materials for drug candidates approved under accelerated approval regulations are subject to prior
review by FDA.
Once an NDA is submitted for a product
intended to treat a serious condition, the FDA may assign a priority review designation if FDA determines that the product, if
approved, would provide a significant improvement in safety or effectiveness. A priority review means that the goal for the FDA
to review an application is six months, rather than the standard review of ten months under current PDUFA guidelines. Under the
current PDUFA agreement, these six- and ten- month review periods are measured from the 60-day filing date rather than the receipt
date for NDAs for new molecular entities, which typically adds approximately two months to the timeline for review from the date
of submission. Most products that are eligible for fast track and/or breakthrough therapy designation are also likely to be considered
appropriate to request and potentially receive a priority review. 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. In addition, the manufacturer of an investigational drug for a serious or life-threatening
disease is required to make available, such as by posting on its website, its policy on responding to requests for expanded access.
Furthermore, fast track designation, breakthrough therapy designation, accelerated approval and priority review do not change the
standards for approval and may not ultimately expedite the development or approval process.
The Hatch-Waxman Act
Section 505 of the FDCA describes three
types of applications that may be submitted to request marketing authorization for a new drug. A 505(b)(1) NDA is an application
that contains full reports of investigations of safety and effectiveness. The Hatch-Waxman Act created two additional marketing
pathways under Sections 505(j) and 505(b)(2) of the FDCA. Section 505(j) establishes an abbreviated approval process for generic
versions of approved drug products through the submission of an abbreviated new drug application, or ANDA. An ANDA provides for
marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the branded reference
drug and has been shown to be bioequivalent to the branded reference drug. ANDA applicants are required to conduct bioequivalence
testing to confirm chemical and therapeutic equivalence to the branded reference drug. Generic versions of drugs can often be substituted
by pharmacists under prescriptions written for the branded reference drug.
In addition, an applicant may submit an
NDA under Section 505(b)(2) of the FDCA. Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendments and permits the filing
of an NDA where at least some of the information required for approval comes from FDA’s conclusions of safety or efficacy
from studies or trials not conducted by or for the applicant, and for which the applicant has not received a right of reference.
If the 505(b)(2) applicant can establish that reliance on the FDA’s previous findings of safety and effectiveness is scientifically
appropriate, it may eliminate the need to conduct certain preclinical studies or clinical trials of the new product. The FDA may
also require companies to perform additional studies or measurements, including clinical trials, to support the change from the
approved reference, or “listed” drug. The FDA may then approve the new product candidate for all, or some, of the label
indications for which the reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
Notwithstanding the approval of many products
by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical companies and others have objected to the
FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), or if the FDA’s
interpretation is successfully challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2)
NDA that we submit.
The Orange Book
In seeking approval for a drug through
an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval
of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products
with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited
by potential generic competitors in support of approval of an ANDA. An ANDA provides for marketing of a drug product that has the
same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing
to be bioequivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required
to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs
approved in this way are considered to be therapeutically equivalent to the listed drug, are commonly referred to as “generic
equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original
listed drug in accordance with state law.
To the extent that a Section 505(b)(2)
NDA relies on clinical trials conducted for a previously approved drug product or the FDA’s prior findings of safety and
effectiveness for a previously approved drug product, the Section 505(b)(2) applicant must submit patent certifications in its
Section 505(b)(2) application with respect to any patents for the previously approved product on which the applicant’s application
relies that are listed in the Orange Book. Specifically, the applicant must certify for each listed patent that, in relevant part,
(i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired,
but will expire on a particular date and approval is not sought until after patent expiration; or (iv) the listed patent is invalid,
unenforceable or will not be infringed by the proposed new product.
A certification that the new product will
not infringe the previously approved product’s listed patent or that such patent is invalid or unenforceable is known as
a Paragraph IV certification. If the applicant does not challenge one or more listed patents through a Paragraph IV certification,
the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents claiming the referenced product have
expired. Further, the FDA will also not approve, as applicable, a Section 505(b)(2) NDA application until any non-patent exclusivity,
such as, for example, five-year exclusivity for obtaining approval of a new chemical entity, three-year exclusivity for an approval
based on new clinical trials, or pediatric exclusivity, listed in the Orange Book for the referenced product, has expired. If a
generic drug product is ready for approval before the expiration of any patents or exclusivities accorded to the reference
listed drug product, the FDA issues a tentative approval letter to the applicant. The tentative approval letter details the
circumstances associated with the tentative approval. The FDA delays final approval of the generic drug product until all patent
or exclusivity issues have been resolved. A tentative approval does not allow the applicant to market the generic drug product.
If the Section 505(b)(2) NDA applicant
has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to
the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the Section
505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit
against the Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt
of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2)
NDA until the earliest to occur of 30 months beginning on the date the patent holder receives notice, expiration of the patent,
settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed. Even if a patent infringement
claim is not brought within the 45-day period, a patent infringement claim may be brought under traditional patent law, but it
does not invoke the 30-month stay.
Moreover, in cases where a Section 505(b)(2)
application containing a Paragraph IV certification is submitted after the fourth year of a previously approved drug’s five-year
exclusivity period and the patent holder brings suit within 45 days of notice of certification, the 30-month period is automatically
extended to prevent approval of the Section 505(b)(2) application until the date that is seven and one-half years after approval
of the previously approved reference product. The court also has the ability to shorten or lengthen either the 30 month or the
seven and one-half year period if either party is found not to be reasonably cooperating in expediting the litigation.
Marketing Exclusivity
In addition to patent protections applicable
to a listed drug, a Section 505(b)(1) application and a 505(b)(2) application may be subject to periods of statutory market exclusivity
afforded to an approved new drug. Statutory market exclusivity provides the holder of an approved NDA limited protection from new
competition in the marketplace for the innovation represented by its approved drug product, and precludes approval of certain 505(b)(2)
and abbreviated new drug applications (ANDAs) referencing the approved drug product for prescribed periods of time. Exclusivity
is available for new chemical entities, as well as for significant changes in already approved drug products, such as a new indication
or new use. FDA may refuse to approve a Section 505(b)(2) or ANDA application that is referencing a previously approved drug product
to the extent that the drug product is subject to market exclusivity. Upon NDA approval of a new chemical entity or NCE, which
is a drug that contains no active moiety that has been approved either alone or in combination by the FDA in any other NDA, that
drug receives five years of marketing exclusivity and during which time the FDA cannot receive any ANDA or 505(b)(2) application
seeking approval of a drug that references a version of the NCE drug, except that such applications may be submitted after 4 years
if they contain a certification of patent invalidity or noninfringement. Certain approvals granted for change(s) to a drug resulting
from new clinical studies that were “essential to approval,” such as a new dosage form, strength, route of administration,
dosing regimen or indication, are associated with a three-year period of exclusivity. During this three-year exclusivity, the FDA
cannot approve an ANDA or 505(b)(2) application that includes the change(s). Drugs based on an “old antibiotic,” such
as AMZEEQ and our FMX103 and FCD105 product candidates which contain minocycline, must also demonstrate “a significant new
use” such as a new indication for a previously approved antibiotic, and not just refinements in labeling related to previously
approved uses, in order to qualify for the three-year exclusivity. A claim of market exclusivity of three years was requested in
the original NDA for AMZEEQ, but we do not know if or when it may be granted.
Post-approval requirements
Any drug products for which we receive
FDA approval will be subject to continuing regulation by the FDA. Certain requirements include, inter alia, record-keeping requirements,
reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information on an annual
basis or more frequently for specific events, product sampling and distribution requirements, complying with certain electronic
records and signature requirements and complying with FDA promotion and advertising requirements. These promotion and advertising
requirements include, among others, standards for direct-to-consumer advertising, prohibitions against promoting drugs for uses
or patient populations that are not described in the drug’s approved labeling, known as “off-label use,” and
other promotional activities, such as those considered to be false or misleading. Failure to comply with FDA requirements can have
negative consequences, including the immediate discontinuation of noncomplying materials, adverse publicity, enforcement letters
from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Such enforcement
may also lead to scrutiny and enforcement by other government and regulatory bodies.
Although physicians may prescribe legally
available drugs for off-label uses, manufacturers may not encourage, market or promote such off-label uses. As a result, “off-label
promotion” has formed the basis for litigation under the Federal False Claims Act, or FCA, violations of which are subject
to significant civil fines and penalties. In addition, under the federal Physician Payments Sunshine Act, manufacturers of certain
prescription products are required to disclose annually to the Centers for Medicaid and Medicare Services, or CMS payments or transfers
of value made to “covered recipients” and teaching hospitals, and ownership or investment interests held by covered
recipients and their immediate family members. Reportable payments and transfers of value may be direct or indirect, in cash or
kind, for any reason, and are required to be disclosed even if the transfers are not related to an approved product. Failure to
comply with the Physician Payments Sunshine Act could result in penalties up to $1.15 million per year.
The manufacturing of any of our products
will be required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. The FDA’s
cGMP 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. These entities are further subject to periodic unannounced inspections by the FDA 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.
Discovery of problems with a product after
approval may result in serious and extensive restrictions or other consequences for a product, manufacturer or holder of an approved
NDA, as well as lead to potential market disruptions. These restrictions or consequences may include untitled or warning letters,
recalls, suspension of a product until the FDA is assured that quality standards can be met, and 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, or Phase IV testing, as well as REMS to monitor the effects of an approved product or place conditions on an approval
that could otherwise restrict the distribution or use of our products.
Pediatric trials and
exclusivity
Even when not pursuing a pediatric indication,
under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate to assess the
safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support
dosing and administration for each pediatric subpopulation for which the product is safe and effective. With enactment of the Food
and Drug Administration Safety and Innovation Act, or the FDASIA, in 2012, sponsors must also submit pediatric trial plans prior
to the assessment data. Those plans must contain an outline of the proposed pediatric trials the applicant plans to conduct, including
trial objectives and design, any deferral or waiver requests, and other information required by regulation. The applicant, the
FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree
upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.
The FDA may, on its own initiative or at
the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product
for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating
to deferral requests and requests for extension of deferrals are contained in the FDASIA.
Separately, in the event the FDA makes
a written request for pediatric data relating to a drug product, an NDA sponsor who submits such data may be entitled to pediatric
exclusivity. Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides
for the attachment of an additional 6 months of marketing protection to the term of any existing regulatory exclusivity, including
the non-patent and orphan exclusivity.
Patent term restoration
and extension
A patent claiming a new drug product may
be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, generally
referred to as the “Hatch-Waxman Act,” which permits an extension of the term of a patent for up to five years to compensate
patent holders for marketing time lost while developing the product and awaiting government
approval during the FDA regulatory review. The basis for the patent extension is the regulatory review period, which is basically
composed of two parts, a testing phase and an approval phase, less a reduction, if any, in either part for a period time where
there was a finding of lack of due diligence. The restoration period granted can be up to one-half the time between the effective
date of an IND and the submission date of an NDA (testing phase), plus the time between the submission date of an NDA and the ultimate
approval date (approval phase). Patent term extension cannot be used to extend the remaining term of a patent past a total of 14
years from the product’s approval date. In other words, the total maximum patent life for the product with the patent extension
cannot exceed 14 years from the products approval date, which amounts to 14 years of potential marketing time. Only one patent
applicable to an approved drug product may be extended, and the application for the extension must be submitted prior to the expiration
of the patent in question and within 60 days of FDA approval. A patent that covers multiple drugs for which approval is sought
can only be extended in connection with one of the approvals and the scope of the extended patent is limited to the approved drug.
The USPTO reviews and approves the application for any patent term extension in consultation with the FDA. The term of a patent
which claims a human drug product , a method of using the product, or a method of manufacturing the product may potentially be
extended if it satisfies the various conditions including that it is the first permitted commercial marketing or use of the drug.
The patents for serlopitant and its use are potentially eligible for patent term extension under the Hatch-Waxman Act, if serlopitant
is approved by the FDA, because serlopitant has never been approved by the FDA. The patents supporting AMZEEQ were not eligible
for the said patent term extension, since minocycline the active pharmaceutical ingredient of AMZEEQ was already approved for marketing
by the FDA. The same reasoning will also apply to our FMX103 and FCD105 product candidates.
Review and approval
of drug products outside the United States
In addition to regulations in the United
States, we are subject to a variety of foreign regulations governing manufacturing, clinical trials, commercial sales and distribution
of our future products. Whether or not we obtain FDA approval for a product candidate, we must obtain approval of the product by
the comparable regulatory authorities of foreign countries before commencing clinical trials or marketing in those countries. The
approval process varies from country to country and can be subject to uncertainties, and the time may be longer or shorter than
that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement
vary greatly from country to country.
Regulation in the European
Economic Area
In the European Economic Area, or EEA,
which is composed of the Member States of the European Union plus Norway, Iceland and Liechtenstein, medicinal products can only
be commercialized after obtaining a Marketing Authorization, or MA.
There are two types of MAs:
|
·
|
The Community MA, which is issued by the European Commission through
the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the European
Medicines Agency, or EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory
for certain types of products, such as biotechnology medicinal products, orphan medicinal products and medicinal products that
contain a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune
and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in
the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest
of public health in the EU. Under the Centralized Procedure the maximum timeframe for the evaluation of a marketing authorization
application is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant
in response to questions asked by the CHMP). Accelerated evaluation might be granted by the CHMP in exceptional cases, when the
authorization of a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint
of therapeutic innovation. Under the accelerated procedure the standard 210 days review period is reduced to 150 days.
|
|
·
|
National MAs, which are issued by the competent authorities of the
Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory
scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this
National MA can be recognized in another Member State through the Mutual Recognition Procedure. If the product has not received
a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through
the Decentralized Procedure.
|
Prior to obtaining an MA in the EEA, applicants
have to demonstrate compliance with all measures included in a Paediatric Investigation Plan, or PIP, approved by the EEA regulatory
agency, covering all subsets of the pediatric population, unless the EEA regulatory agency has granted (1) a product-specific waiver,
(2) a class waiver or (3) a deferral for one or more of the measures included in the PIP.
In the EEA, upon receiving an MA, new chemical
entities generally receive eight years of data exclusivity and an additional two years of market exclusivity. If granted, data
exclusivity prevents regulatory authorities in the EEA from referencing the innovator’s data to assess a generic application.
During the additional two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s
data may be referenced, but no generic product can be marketed until the expiration of the market exclusivity. However, there is
no guarantee that a product will be considered by the EEA regulatory agencies to be a new chemical entity, and products may not
qualify for data exclusivity.
Pharmaceutical coverage,
pricing and reimbursement
Significant uncertainty exists as to the
coverage and reimbursement status of any product and any product candidates for which we obtain regulatory approval. In the United
States and other markets, sales of any product, and any product candidates for which we receive regulatory approval for commercial
sale, will depend in part on the availability of coverage and adequate reimbursement from third party payors. Third party payors
include government health administrative authorities, managed care providers, private health insurers and other organizations.
The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting
the price or reimbursement rate that the payor will pay for the drug product. Third party payors may limit coverage to specific
drug products on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular
indication.
Third party payors are increasingly challenging
the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety
and efficacy. A payor may not consider a product to be medically necessary or cost-effective. Moreover, a payor’s decision
to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved, or that other payors
will similarly provide similar coverage for the product. Adequate third-party reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our investment in product development. We have had some early
success in obtaining coverage for AMZEEQ. In the first week of launch, one of the largest pharmacy benefit managers Express Scripts
added AMZEEQ to its national formulary in a preferred status position. However, this does not imply that other pharmacy benefit
managers will provide similar coverage for AMZEEQ or provide coverage at all. We have evaluated the optimal price range for AMZEEQ
and FMX103 that will reflect their benefits relative to alternative treatments while remaining affordable to potential customers
and reimbursable by governments and third-party payors. Our pricing and overall access strategy prioritizes patients and their
healthcare providers by providing novel medicines at pricing designed to help provide the broadest possible access to products
for patients. We are continuing our contract negotiations with other pharmacy benefit managers in the U.S. for AMZEEQ pursuant
to this strategy.
CMS administers the Medicaid drug rebate
program, in which pharmaceutical manufacturers pay quarterly rebates to each state Medicaid agency. Generally, for branded prescription
drugs marketed under NDAs, as AMZEEQ, FMX103 and our other product candidates are expected to be, manufacturers are required to
rebate the greater of 23.1% of the average manufacturer price or the difference between such price and the best price during a
specified period. An additional rebate for products marketed under NDAs is payable if the average manufacturer price increases
at a rate higher than inflation, and other methodologies apply to new formulations of existing drugs. In addition, the ACA revised
certain definitions used for purposes of calculating the rebates, including the definition of “average manufacturer price.”
Various state Medicaid programs have implemented voluntary supplemental drug rebate programs that may provide states with additional
manufacturer rebates in exchange for preferred status on a state’s formulary or for patient populations that are not included
in the traditional Medicaid drug benefit coverage.
In the European Union, pricing and reimbursement
schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement
price has been agreed. Some countries may require the completion of additional studies or trials that compare the cost-effectiveness
of a particular drug candidate to currently available therapies. For example, the European Union provides options for its member
states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control
the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or
it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the
market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits.
The downward pressure on health care costs in general, and particularly on prescription drugs, has become intense. As a result,
increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports
from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls
or reimbursement limitations for drug products may not allow favorable reimbursement and pricing arrangements.
Healthcare laws and regulations
In March 2010, the then President of the
United States signed one of the most significant healthcare reform measures in decades. The healthcare reform law, also known as
the Affordable Care Act, or ACA, substantially changes the way healthcare will be financed by both governmental and private insurers,
and significantly impacts the pharmaceutical industry. This comprehensive legislative overhaul was expected to extend coverage
to approximately 36 million previously uninsured Americans. However, the individual mandate was recently repealed by Congress in
The Tax Cuts and Jobs Act of 2017, or the Tax Act, tax reform bill that was signed into law in December 2017 and became effective
January 1, 2019. The Joint Committee on Taxation estimates that the repeal will result in over 13 million Americans losing their
health insurance coverage by 2027 and is likely to lead to increases in insurance premiums. On December 14, 2018, a U.S. District
Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA,
and because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. In December 2019,
the U.S. Court of Appeals for the Fifth Circuit upheld the lower court decision, which was then appealed to the U.S. Supreme Court.
The U.S. Supreme Court declined to hear the appeal on an expedited basis and so no decision will be forthcoming until the next
Supreme Court term in late 2020 or early 2021. It is unclear how this decision, subsequent appeals, if any, and other efforts to
repeal and replace the ACA will impact the ACA.
The ACA requires the pharmaceutical industry
to share in the costs of reform by increasing Medicaid rebates and expanding Medicaid rebates to cover Medicaid managed care programs,
among other things. The ACA also includes funding of pharmaceutical costs for Medicare patients in excess of the prescription drug
coverage limit and below the catastrophic coverage threshold. The Bipartisan Budget Act of 2018, or the BBA, among other things,
amends the ACA, effective January 1, 2019, to close this gap, also known as the “donut hole”. Additionally, an excise
tax was levied against certain branded pharmaceutical products. The Administration is expected to evaluate drug pricing and the
Medicare parts B and D programs in terms of policy changes in the next session of Congress.
Healthcare providers, physicians and third
party payors play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements
with healthcare providers, third party payors and other customers are subject to broadly applicable fraud and abuse and other healthcare
laws and regulations. Such restrictions under applicable federal and state healthcare laws and regulations include the following:
|
·
|
the federal healthcare Anti-Kickback Statute prohibits, among other
things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly,
in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of,
any good or service for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare or
Medicaid. The term “remuneration” has been broadly interpreted to include anything of value, including cash, improper
discounts, and free or reduced price items and services. The intent standard under the federal Anti-Kickback Statute was amended
by ACA to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation. Moreover, under the ACA, the government may assert that a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes
of the federal civil FCA. Additionally, many states have similar laws that apply to their state health care programs as well as
private payors. Violations of the federal or state anti-kickback laws can result in exclusion from federal and state health care
programs and substantial civil and criminal penalties;
|
|
·
|
the federal civil and criminal false claims laws and civil monetary
penalties laws, including the federal FCA, which prohibit, among other things, individuals or entities from knowingly presenting,
or causing to be presented, false, fictitious or fraudulent claims for payment from Medicare, Medicaid or other federal healthcare
programs, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent
claim to avoid, decrease or conceal an obligation to pay money to the federal government. Even where pharmaceutical companies do
not submit claims directly to payors, they can be held liable under these laws if they are deemed to “cause” the submission
of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers, promoting a product
off-label, marketing products of sub-standard quality, or paying a kickback that results in a claim for items or services. In addition,
activities relating to the reporting of wholesaler or estimated retail prices for pharmaceutical products, the reporting of prices
used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for
such products, and the sale and marketing of such products, are subject to scrutiny under this law. Private individuals or whistleblowers
can bring FCA “qui tam” actions on behalf of the government and may share in amounts recovered. Proof of intent to
deceive is not required to establish liability under the civil False Claims Act;
|
|
·
|
the federal Health Insurance Portability and Accountability Act of
1996, or HIPAA, imposes criminal and civil liability for, among other things, executing or attempting to execute a scheme to defraud
any healthcare benefit program, including any third party payors, knowingly and willfully embezzling or stealing from a healthcare
benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying,
concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements or representations,
or making false statements relating to healthcare benefits, items, or services. Similar to the federal Anti-Kickback Statute, a
person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
|
|
·
|
HIPAA, as amended by the Health Information Technology for Economic
and Clinical Health Act, or HITECH, and their implementing regulations, which imposes privacy, security, transmission and breach
reporting obligations, including mandatory contractual terms, with respect to individually identifiable health information including
PHI, upon “covered entities” subject to the law, such as health plans, healthcare clearinghouses and certain healthcare
providers, and their respective business associates that perform services on their behalf that involve individually identifiable
health information, including PHI. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal
penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for
damages or injunctions in federal courts to enforce HIPAA laws and seek attorneys’ fees and costs associated with pursuing
federal civil actions. Other federal and state laws, such as the Federal Trade Commission Act, also impose requirements with respect
to individuals' personal information;
|
|
·
|
the federal Physician Payments Sunshine Act requires certain manufacturers
of prescription drugs, devices and medical supplies for which payment is available under Medicare, Medicaid or the Children’s
Health Insurance Program to annually report to CMS information related to payments and other transfers of value to physicians,
dentists, optometrists, podiatrists, chiropractors and teaching hospitals, and ownership and investment interests held by physicians
and their immediate family members. In addition, Section 6004 of the ACA requires annual reporting of information about drug samples
that manufacturers and authorized distributors provide to physicians; and
|
|
·
|
analogous state and foreign laws and regulations, such as state anti-kickback
and false claims laws, which may apply more broadly than their U.S. federal analogues, such as to sales or marketing arrangements
and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers;
state laws that require drug companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance
guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other
potential referral sources; state and local laws that require the licensure of sales representatives; state laws that require drug
manufacturers to report information related to drug pricing or payments and other transfers of value to healthcare providers or
marketing expenditures and pricing information; data privacy and security laws and regulations in foreign jurisdictions that may
be more stringent than those in the United States (such as the European Union, which adopted the General Data Protection Regulation,
which became effective in May 2018); state laws governing the privacy and security of health information in certain circumstances,
many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;
and state laws related to insurance fraud in the case of claims involving private insurers.
|
If our operations are found to be in violation
of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be subject
to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation
in government healthcare programs, such as Medicare and Medicaid, imprisonment, additional reporting obligations and oversight
if we becomes subject to a corporate integrity agreement or consent decree, reputational harm, diminished profits and future earnings,
and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business
and pursue our strategy.
Environmental, Health and
Safety Matters
We are subject to extensive environmental,
health and safety laws and regulations in a number of jurisdictions, primarily Israel, governing, among other things, (i) the use,
storage, registration, handling, emission and disposal of chemicals, waste materials and sewage; and (ii) chemical, air, water
and ground contamination, air emissions and the cleanup of contaminated sites, including any contamination that results from spills
due to our failure to properly dispose of chemicals, waste materials and sewage. Our operations at our Rehovot research and development
facility use chemicals and produce waste materials and sewage. Our activities require permits from various governmental authorities
including, local municipal authorities, the Ministry of Environmental Protection and the Ministry of Health. The Ministry of Environmental
Protection and the Ministry of Health, local authorities and the municipal water and sewage company conduct periodic inspections
in order to review and ensure our compliance with the various regulations.
These laws, regulations and permits could
potentially require the expenditure by us of significant amounts for compliance or remediation. If we fail to comply with such
laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation
of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil
judgments in respect of third party claims, including those relating to personal injury (including exposure to hazardous substances
we use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental, health
and safety laws allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be
identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial
condition and results of operations.
In addition, laws and regulations relating
to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations,
we could be subject to new compliance measures or to penalties for activities which were previously permitted. For instance, Israeli
regulations were promulgated in 2011 relating to the discharge of industrial sewage into the sewer system. These regulations establish
new and potentially significant fees for discharging forbidden or irregular sewage into the sewage system.
The operations of our subcontractors and
suppliers are also subject to various Israeli and foreign laws and regulations relating to environmental, health and safety matters,
and their failure to comply with such laws and regulations could have a material adverse effect on our business and reputation,
result in an interruption or delay in the manufacture of AMZEEQ or the development or manufacture of our product candidates, or
increase the costs for the manufacture of AMZEEQ or for the development or manufacture of our product candidates.
Employees
As of March 31, 2020, we had a total of
181 employees, 180 of whom are full-time employees, 58 of whom were primarily engaged in research and development activities. A
total of 8 employees have an M.D. or Ph.D. degree. None of our employees are represented by a labor union, and we consider our
employee relations to be good.
Financial and Segment Information
We operate our business as a single segment,
as defined by generally accepted accounting principles. Our financial information is included in the consolidated financial statements
and the related notes.
Legal Proceedings
From time to time, we may become involved
in litigation or other legal proceedings relating to claims that we consider to be
arising from the ordinary course of our business. There
are currently no claims or actions pending against us that, in the opinion of our management, are likely to have a material adverse
effect on our business.
In
November 2018 and January 2019, putative securities class action complaints were filed against Menlo, certain former executive
officers and directors, and certain underwriters in our IPO. The complaints allege violations of Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 due to allegedly false and misleading statements in connection with the IPO. The parties have mediated
the consolidated lawsuit and reached a settlement. The settlement is subject to final documentation and Court approval. We maintain
director and officer insurance with liability coverage limits that we believe are adequate and customary for the nature of our
business, and we have submitted these claims to our insurance carrier.
Corporate Information
Our legal and commercial name is Menlo
Therapeutics Inc. We were incorporated in the State of Delaware in October 2011. On March 9, 2020 we completed a transaction with
Foamix pursuant to which Foamix became a wholly-owned subsidiary of Menlo.
Following the Merger, we will continue
to be an “emerging growth company,” as defined in Section 2(a) of the Securities Act and as modified by the JOBS Act
and a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act. As such, we are eligible to take advantage
of certain exemptions from various reporting requirements, such as the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, and certain reduced or scaled disclosure requirements available to smaller reporting companies.
Our principal executive offices are located
at 520 U.S. Highway 22, Suite 204, Bridgewater, NJ 08807. Our website is www.menlotherapeutics.com.