Overview
We are a global biopharmaceutical company focused
on developing, identifying, acquiring and bringing to market innovative medicines that meet unmet medical needs. Our primary focus
areas are gastroenterology, ophthalmology, and oncology-related disorders.
We currently generate revenue mainly from
product royalties, product sales, upfront and milestone payments, and reimbursements for development activities. We expect to
continue to incur significant expenses for the next several years as we continue our research and development activities, seek
additional regulatory approvals and additional indications for our approved products and other compounds and seek strategic opportunities
for in-licensing new products.
Our operations are conducted through subsidiaries
based in the United States (U.S.), Japan and Switzerland. We operate as one segment, which focuses on the development and commercialization
of pharmaceutical products.
Our Strategy
Our strategy is focused on becoming a leading
biopharmaceutical company. We are built on the ongoing pursuit of scientific innovation and an unwavering passion for improving
the lives of patients, their family members and their caregivers. We are committed to harnessing our past successes to maximize
in-market revenues, focus our clinical development efforts, and enhance our scientific capabilities.
In 2016, we advanced our corporate strategy
by further solidifying our base business, executing on business development transactions and diversifying our pipeline portfolio
through the acquisition of new product candidates. We executed and accomplished the following key milestones:
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Entered into an option and collaboration agreement under which Cancer Prevention Pharmaceuticals,
Inc. (“CPP”) has granted us the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac combination
product in North America. This product is currently in a phase 3 clinical trial for the treatment of familial adenomatous polyposis
(FAP).
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Entered into a Settlement and License Agreement to dismiss by mutual consent our lawsuit against
Dr. Reddy’s Laboratories claiming infringement of seven AMITIZA-related patents listed in the FDA’s Orange Book, with
the latest expiring in 2027. Under this agreement, we granted Dr. Reddy’s a non-exclusive license to market its generic version
of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the U.S. for the indications approved for AMITIZA. This license does
not begin until more than six years from November 9, 2016, or earlier under certain circumstances. Dr. Reddy’s will pay to
us a share of net profits of generic lubiprostone products sold during the term of the agreement, which decreases over time and
ends when all of our related patents have expired.
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Sold $300.0 million aggregate principal amount of 3.25% convertible senior notes due 2021 (the
“Convertible Notes”) in a private placement to qualified institutional buyers. pursuant to Rule 144A under the Securities
Act of 1933, as amended. The proceeds from these notes were used to repay all outstanding amounts under our 2015 credit facility,
as well as for general corporate purposes.
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Through the continued advancement of our AMITIZA
lifecycle management programs, a sustainable pipeline and the acquisition and licensing of additional drug candidates with near-term
launch opportunities, we will seek transformative growth by launching additional products for new therapeutic areas, strengthening
an already sizable revenue base, and creating a sustainable company that is built to last.
Additionally, we continue to seek opportunities
for strategic partnerships to strengthen the development of our existing pipeline and to diversify our revenue base. It is our
vision to develop into a fully integrated, biopharmaceutical company centered on science and innovation and driven by the passionate
and relentless efforts of our employees.
Our Competitive Strengths
Product Pipeline
The table below summarizes the development
status of our marketed products and key product candidates as of March 1, 2017. The commercialization rights to lubiprostone have
been licensed to Takeda Pharmaceutical Company Limited (Takeda) on a global basis other than Japan and the People’s Republic
of China, to Mylan for Japan, and to Gloria for the People’s Republic of China. Commercialization of each product candidate
may occur after successful completion of clinical trials and approval from appropriate governmental agencies. For CPP-1X, we have
an option to acquire an exclusive license to commercialize in North America.
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Country
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Program
Type
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Target Indication
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Development Phase
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Next Milestone
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Lubiprostone (AMITIZA ®)
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U.S.
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Commercial
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Chronic idiopathic constipation (CIC) adults of all ages
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Marketed
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_____
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U.S.
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Commercial
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Irritable bowel syndrome with constipation (adult women) (IBS-C)
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Marketed
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Initiate phase 4 study on higher dosage
and with additional male subjects
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U.S.
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Commercial
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Opioid-induced constipation (OIC) in patients with chronic non-cancer
pain
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Marketed
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_____
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U.S.
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Clinical
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Alternate (Sprinkle) formulation
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In development
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Complete phase 3 trial
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U.S.
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Clinical
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Pediatric functional constipation
(6 months - 6 years)
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Alternate (Sprinkle) formulation in development
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Initiate phase 3 program
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U.S.
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Clinical
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Pediatric IBS-C
(6 years - 17 years)
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Alternate (Sprinkle) formulation in development
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Initiate phase 3 program
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U.S. &
European Union
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Clinical
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Pediatric functional constipation
(6 years - 17 years)
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Open label phase 3 trials ongoing
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Complete open label phase 3 trials and submit sNDA
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Japan
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Commercial
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Chronic constipation
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Marketed
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Japan
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Clinical
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CIC adults, 12mcg capsule
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CTN submitted
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Submit sNDA
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Switzerland
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Commercial
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CIC-adults of all ages
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Marketed
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_____
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Switzerland
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Commercial
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OIC in patients with chronic non-cancer pain
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Marketed
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_____
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U.K.
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Commercial
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CIC-adults of all ages
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Marketed
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_____
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Canada
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Clinical
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CIC-adults of all ages
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Received approval from Health Canada
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Market in Canada
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China
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Clinical
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CIC-adults of all ages
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IND accepted
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Initiate CIC study
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European Union
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Clinical
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CIC-adults of all ages
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Received national marketing approvals in Ireland, Germany, Austria,
Belgium, the Netherlands, Luxembourg, Italy and Spain (where product is not yet launched)
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Launch feasibility and planning under evaluation
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Israel
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Commercial
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CIC-adults of all ages
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Received national marketing approval
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Develop pricing and reimbursement assessments and, based on outcome,
determine launch feasibility and plans
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Mexico
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Clinical
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CIC-adults of all ages
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CTA Approved
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Complete phase 3 trial
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Mexico
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Clinical
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IBS-C - adult women
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CTA Approved
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Complete phase 3 trial
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Mexico
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Clinical
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OIC in patients with chronic non-cancer pain
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CTA Approved
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Complete phase 3 trial
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Russia
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Clinical
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CIC-adults of all ages
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CTA Approved
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Complete phase 3 trial
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Russia
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Clinical
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IBS-C - adult women
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CTA Approved
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Complete phase 3 trial
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South Korea
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Clinical
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CIC-adults of all ages
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CTA Approved
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Complete phase 3 trial
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South Korea
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Clinical
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IBS-C - adult women
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CTA Approved
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Complete phase 3 trial
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South Korea
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Clinical
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OIC in patients with chronic non-cancer pain
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CTA Approved
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Complete phase 3 trial
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Unoprostone isopropyl (RESCULA®)
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Japan
South Korea
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Commercial
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Glaucoma and ocular hypertension
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Marketed
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_____
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Taiwan
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CPP-1X/sulindac combination product
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U.S.
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Option
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Familial adenomatous polyposis (FAP)
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Phase 3
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Complete phase 3 trial
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AMITIZA (lubiprostone)
AMITIZA is a ClC-2 chloride channel activator
developed for the treatment of constipation. AMITIZA acts with a dual mechanism of action, increasing intestinal fluid secretion
while also stimulating recovery of mucosal barrier function. AMITIZA has been approved for three indications that cover distinct
patient types: chronic idiopathic constipation (CIC), irritable bowel syndrome with constipation (IBS-C), and opioid-induced constipation
(OIC). Since 2006, AMITIZA has been dispensed over 10 million times.
Chronic Idiopathic Constipation (CIC)
Constipation is characterized by infrequent
and difficult passage of stool and becomes chronic when a patient suffers specified symptoms for over 12 non-consecutive weeks
within a 12-month period. Chronic constipation (CC) is idiopathic if it is not caused by other diseases or by use of medications.
Symptoms of CIC include straining, hard stools, bloating and abdominal pain or discomfort. Some patients suffering from occasional
constipation may be treated with lifestyle modification, dietary changes and increased fluid and fiber intake, although there is
very limited well-controlled clinical trial data in support of these alternatives in CIC or IBS-C patients. For patients who fail
to respond to these approaches, physicians may recommend laxatives, most of which are available over-the-counter (OTC),
i.e.,
without a prescription, for acute use. These agents are generally not approved for long-term use by CIC or IBS-C patients nor
is such use supported by long-term, well-controlled clinical trial data.
A study published in
The American Journal
of Gastroenterology
in September 2011 estimates that approximately 14% of adults over 15 years of age, or over 30 million people,
in the U.S., suffer from CIC. By the time most CIC patients seek care from a physician they have typically tried dietary and lifestyle
changes, as well as a number of available OTC remedies, and remain unsatisfied. Commonly used OTC medications include laxatives,
stool softeners and fiber supplements.
Irritable Bowel Syndrome with Constipation
(IBS-C)
IBS is a disorder of the intestines with symptoms
that include severe cramping, pain, bloating and changes of bowel habits, such as diarrhea or constipation. Patients diagnosed
with IBS are commonly classified as having one of four forms: IBS-C, IBS with diarrhea, mixed-pattern IBS alternating between constipation
and diarrhea, and unspecified irritable bowel syndrome. Currently, IBS in all its forms is considered to be one of the most common
gastrointestinal disorders. Like CIC, some patients suffering from IBS-C may be treated with dietary measures, such as increasing
fiber and fluid intake; if these measures prove ineffective, laxatives are frequently used for the management of this condition,
though they are not approved for IBS-C.
Opioid-Induced Constipation (OIC)
OIC is a common adverse effect of chronic opioid
use. Binding of opioids to peripheral opioid receptors in the gastrointestinal tract results in reduction of secretion of electrolytes,
such as chloride, and subsequent reduction in small intestinal fluid. In addition, activation of enteric opioid receptors results
in abnormal gastrointestinal motility. Together, these processes result in OIC, which is characterized by infrequent and incomplete
evacuation of stool, hard stool consistency, and straining associated with bowel movements.
Current treatment options for OIC
include the use of stool softeners, enemas, suppositories and peristaltic stimulants such as senna, which stimulate muscle
contractions in the bowel. Additionally, the standard prescription option for OIC is osmotic laxatives. The effectiveness of
these products for the treatment of OIC is limited due to the severity of the constipation caused by opioids. In addition,
physicians often cannot prescribe peristaltic stimulants for the duration of narcotic treatment because of the potential for
dependence upon these stimulants. Opioid drugs are known to suppress firing of secretomotor neurons in the gut which reduces
intestinal fluid secretion resulting in drier, harder stools. Lubiprostone works locally in the gut to reestablish fluid
secretion thus alleviating OIC. As a result, we believe that AMITIZA holds a competitive advantage over drugs that do not
work through this mechanism of action. Additionally, the mechanism of action for AMITIZA is different and unique versus other products that are currently approved for OIC, which
are all peripherally acting mu-opioid receptor antagonists (PAMORAs). This also allows AMITIZA to offer a unique option for
treating this specific type of constipation.
There are more than 200 million prescriptions
for opioid use in the U.S. annually, and a substantial number of these prescriptions are for non-cancer chronic pain. Market research
indicates that there are approximately 2.5-4.5 million moderate to severe sufferers of OIC, and 40-80% of patients taking opioids
chronically for non-cancer pain report constipation in the U.S.
United States and Canada
AMITIZA is marketed in the United States for
the three gastrointestinal indications described above under a collaboration and license agreement, or the North America Takeda
Agreement, with Takeda Pharmaceutical Company Limited, or Takeda. Under the North America Takeda Agreement, we are primarily responsible
for clinical development activities, while Takeda is responsible for commercialization of AMITIZA in the United States and Canada.
Takeda is required to provide a minimum annual commercial investment during the current term of the North America Takeda Agreement
and may reduce the minimum annual commercial investment when a generic equivalent enters the market. In October 2015, Health Canada
approved AMITIZA for CIC in adults. In October 2014, we signed an amendment, or the Takeda Amendment, to the North America Takeda
Agreement, which among other things, extended the term of the North America Takeda Agreement beyond December 2020. During the extended
term beginning in January 2021, we will share with Takeda the annual net sales revenue on branded AMITIZA products. More information
on our collaboration with Takeda in North America is found under the heading “North America Takeda Agreement.”
We have also partnered with Par Pharmaceuticals,
Inc., or Par, and Dr. Reddy’s Laboratories, Ltd., or Dr. Reddy’s, in connection with the settlement of patent litigation
in the United States related to our AMITIZA 8 mcg and 24 mcg soft gelatin capsule products. Under our agreement with Par, we granted
Par a non-exclusive license to market Par’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the
United States for the indications approved for AMITIZA beginning January 1, 2021, or earlier under certain circumstances. Beginning
on January 1, 2021, Par will split with us the gross profits of the licensed products sold during the term of the agreement, which
continues until each of our related patents has expired. Under our agreement with Dr. Reddy’s, we granted Dr. Reddy’s
a non-exclusive license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the
United States for the indications approved for AMITIZA. This license does not begin until more than six years from November 9,
2016, or earlier under certain circumstances. Dr. Reddy’s will pay to us a share of net profits of generic lubiprostone products
sold during the term of the agreement, which decreases over time and ends when all of our related patents have expired. In the
event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, we have agreed to supply
such product under the terms of a manufacturing and supply agreement at a negotiated price.
Japan
In Japan, AMITIZA is the only prescription
medicine for chronic constipation, excluding constipation caused by organic diseases, and is marketed under a license, commercialization
and supply agreement, or the Japan Mylan Agreement, originally entered into with Abbott Laboratories, Inc., or Abbott. In February
2015, Mylan purchased Abbott’s non-U.S. developed markets specialty and branded generics business, as a result of which Mylan
acquired the rights to commercialize AMITIZA in Japan. We did not experience any significant changes in the commercialization of
AMITIZA in Japan as a result of the transfer of the Japan Mylan Agreement from Abbott to Mylan. According to epidemiology data
from Japan’s Ministry of Health. Labour and Welfare (MHLW), millions of people in Japan may live daily with the pain and
discomfort of CC, yet not seek physician care. Medical attention could mean early diagnosis and effective, long-term treatment.
It is estimated that approximately 14.3% of the Japanese population, or over 18 million people, suffer from CC.
People’s Republic of China
In May 2015, we entered into an exclusive license,
development, commercialization and supply agreement, or the China Gloria Agreement, with Harbin Gloria Pharmaceuticals Co., Ltd.,
or Gloria, for AMITIZA in the People’s Republic of China. We will be the exclusive supplier of AMITIZA to Gloria at an agreed
upon supply price. Under the China Gloria Agreement, Gloria is responsible for all development activities and costs, as well as
commercialization and regulatory activities, for AMITIZA in the People’s Republic of China. Upon entering into the China
Gloria Agreement, we received an upfront payment of $1.0 million. In June 2015, the China Food and Drug Administration accepted
an Investigational New Drug, or IND, application for a pivotal trial of AMITIZA in patients with CIC, as a result of which we received
an additional payment of $500,000 from Gloria. In addition to the $1.5 million in payments received and recognized as revenue through
June 2015, we are eligible to receive an additional payment in the amount of $1.5 million upon the occurrence of a specified regulatory
or commercial milestone event.
Other Global Markets
In October 2014, we entered into an exclusive
license, development, commercialization and supply agreement, or the Global Takeda Agreement, for lubiprostone with Takeda. Under
the Global Takeda Agreement, Takeda develops and markets AMITIZA globally except in the United States, Canada, Japan and the People’s
Republic of China. We supply Takeda with the clinical and commercial product at a negotiated price. Takeda currently markets AMITIZA
for CIC and OIC in Switzerland and currently markets AMITIZA for CIC in the United Kingdom. Takeda became the marketing authorization
holder in Switzerland in April 2015, in the United Kingdom, Austria, Belgium, Germany, Netherlands, Ireland, Italy, Luxembourg
and Spain during 2016. More information on our collaboration with Takeda in global markets is found under the heading “Global
Takeda Agreement.”
Before the execution of the Global Takeda Agreement,
we retained full rights to develop and commercialize AMITIZA for the rest of the world’s markets outside of the United States,
Canada and Japan. In the United Kingdom, we received approval in September 2012 from the Medicines and Healthcare Products Regulatory
Agency for the use of AMITIZA to treat CIC. We made AMITIZA available in the United Kingdom in the fourth quarter of 2013. In July
2014, National Institute of Health and Care Excellence published the technology appraisal guidance recommending the use of AMITIZA
in the treatment of CIC and associated symptoms in adults who have failed laxatives. In January 2015, we successfully completed
the European mutual recognition procedure for AMITIZA for the treatment of CIC in select European countries, resulting in marketing
authorizations in these countries.
In Switzerland, AMITIZA was approved to treat
CIC in 2009. In 2012, we reached an agreement with the Bundesamt fur Gesundheit (BAG), the Federal Office of Public Health in Switzerland,
on a reimbursement price for AMITIZA in Switzerland, and began active marketing in the first quarter of 2013. In February 2014,
the BAG revised several reimbursement limitations with which AMITIZA was first approved for reimbursement and inclusion in the
Spezialitätenliste (SL) to allow all Swiss physicians to prescribe AMITIZA to patients who have failed previous treatments
with at least two laxatives over a nine-month period. In July 2014, AMITIZA was approved for the treatment of OIC in chronic, non-cancer
adult patients by the Swissmedic, the Swiss Agency for Therapeutic Products, and in October 2015, the BAG added this indication
to the SL.
In October 2015, Takeda obtained approval of
the clinical trial application, or CTA, for AMITIZA for the treatment of CIC and IBS-C in Russia that was submitted in June 2015.
In December 2015, a CTA was filed for AMITIZA for the treatment of CIC, IBS-C and OIC in Mexico and South Korea. Takeda initiated
phase 3 registration trials in Russia in March 2016 and in South Korea and Mexico in May 2016. Takeda submitted a new drug application,
or NDA, for the treatment of CIC, IBS-C, and OIC in Israel in June 2015, which was approved in July 2016, and an NDA for the same
indications in Kazakhstan in December 2015. Additional NDA submissions have been made by Takeda in Singapore in May 2016, and South
Africa and Indonesia in June 2016.
A study published in
The American Journal
of Gastroenterology
in September 2011 estimates that approximately 16% of adults over 15 years of age, or over 42 million people,
in Northern Europe suffer from CIC.
In a study conducted in ten European countries,
including Switzerland, the results of which were published in
Alimentary Pharmacology and Therapeutics
in 2012, approximately
28% of the participants suffering from constipation for at least 6 months were dissatisfied with their current treatment options
using laxatives. Of that group, approximately 83% were interested in seeking alternative methods to relieve their constipation.
RESCULA (unoprostone isopropyl)
RESCULA is a Big Potassium (BK) channel activator
used to lower intraocular pressure (IOP). In October 2015, we acquired R-Tech Ueno, Ltd., or R-Tech, a global biopharmaceutical
company focused on the research and development of drugs for inflammatory conditions, oncology and ophthalmology. Pursuant to the
acquisition, we acquired global rights to RESCULA. In the United States, we ceased marketing RESCULA in the fourth quarter of 2014
and no product was made available after the March 2015 expiration date. In May 2015, we returned all licenses for unoprostone isopropyl
to R-Tech. In June 2016, we completed the withdrawal of the marketing authorization for RESCULA in the United States. RESCULA is
being commercialized by Santen Pharmaceutical Co., Ltd in Japan, and Sinphar Pharmaceutical, Co., Ltd and Zuellig Pharma Inc. in
Taiwan.
Our Clinical Development Programs
Lubiprostone
Alternate Formulation
We are developing an alternate formulation
of lubiprostone for both adult and pediatric patients who are unable to take or do not tolerate capsules and for naso-gastric tube
fed patients. It is estimated that approximately 40% of American adults have difficulty swallowing pills. Of those who have experienced
difficulty swallowing pills, approximately 14% have delayed taking doses of their medication, 8% have skipped a dose and 4% have
discontinued using their medication. In addition, the current formulation of pills is not amenable for administration to young
children (6 months and older). Takeda has agreed to fund 100% of the costs, up to a cap, of this alternate formulation work. We
initiated the phase 3 program of the alternate formulation of lubiprostone in adults in the second half of 2016 and, if the program
is successful, we intend to file an NDA in the United States for the alternate formulation for adults in the second half of 2017.
Pediatric Functional Constipation
The phase 3 program required to support an
application for marketing authorization of lubiprostone for pediatric functional constipation comprises four clinical trials. The
first two trials, one of which was recently completed, test the soft gelatin capsule formulation of lubiprostone in patients 6
to 17 years of age. The first of these trials was a pivotal 12-week, randomized, placebo-controlled trial which was initiated in
December 2013 and completed enrollment in April 2016. The second trial is a follow-on, long-term safety extension trial that was
initiated in March 2014. In November 2016, we announced that the phase 3 trial of AMITIZA in pediatric functional constipation
in children 6 to 17 years of age failed to achieve its primary endpoint of overall spontaneous bowel movement, or SBM, response.
The trial achieved statistical significance for some secondary endpoints, notably overall SBM frequency, straining, and stool consistency.
In addition, in this study lubiprostone was well tolerated. We have entered into a process with the U.S. Food and Drug Administration,
or FDA, and other constituencies, and as a result of initial discussion with the FDA will submit an sNDA in the second half of
2017. Additionally, after further consultations with the FDA to better determine the doses and endpoints that should be studied,
the phase 3 program for the alternate formulation of lubiprostone described above will be followed in mid-2018 with a phase 3 program
in patients 6 months to 6 years of age using the alternate formulation. Takeda has agreed to fund 70% of the costs, up to a cap,
of this pediatric functional constipation program.
Constipation in children has similar characteristics
to those of constipation in adults; symptoms include infrequent bowel movements, hard stools, large diameter stools and painful
passage of stools. Children may also experience fecal retention due to withholding, since there is a tendency to avoid defecation
and withhold bowel movements as a result of the pain experienced from the passage of large stools. This withholding of bowel movements
can result in episodes of fecal incontinence. The Rome III diagnostic criteria for childhood functional constipation dictate that
such symptoms occur at least once per week for at least 2 months prior to diagnosis. Furthermore, ninety percent of pediatric constipation
is functional constipation and it occurs in all age groups. An analysis of longitudinal data in the U.S. showed that over the last
decade there has been a nearly 4-fold increase in rates of constipation. Nevertheless, the estimates of the prevalence rate of
functional constipation in the pediatric population worldwide have varied greatly, from 4% to 37%. Regardless of this wide range
of estimated prevalence, only 50-70% of children with functional constipation achieve long-term improvement with the current treatments,
indicating a need for better treatments.
VAP-1 Inhibitors
In 2016, we discontinued our VAP-1 Inhibitor
RTU-1096 development program and our VAP-1 Inhibitor RTU-009 program.
CPP- 1X/Sulindac Combination Product
In January 2016, we entered into an option
and collaboration agreement under which CPP has granted us the sole option to acquire an exclusive license to commercialize CPP-1X/sulindac
combination product in North America. This product is currently in a Phase 3 clinical trial being conducted by CPP for the treatment
of familial adenomatous polyposis, or FAP. Under our agreement with CPP, we have the exclusive option to license this product for
North America. There are currently no approved treatments for FAP. The ongoing Phase 3 study is a 150-patient, three-arm, double-blind,
randomized trial of the combination agent and the single agent comparators. Enrollment in the study has completed and the results
from a Phase 3 futility analysis are expected to be available mid-2017. The trial is expected to conclude in 2019.
AMITIZA Collaboration Agreements
We have the following collaboration agreements
with our partners to supply, develop and commercialize AMITIZA:
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North America Takeda Agreement;
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Global Takeda Agreement;
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Japan Mylan Agreement; and,
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China Gloria Agreement.
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The collaboration agreements are covered by geographic
location.
North America Takeda Agreement
In October 2004, we entered into an agreement
with Takeda to supply, develop and commercialize AMITIZA for gastrointestinal indications in the U.S. and Canada. The original
agreement was amended on February 1, 2006 through a supplemental agreement and, in October 2014, we and Takeda and certain Takeda
affiliates executed amendments to the agreement. Collectively, these are referred to as the North America Takeda Agreement. Payments
to us under these agreements include a non-refundable upfront payment, non-refundable development and commercial milestone payments,
reimbursement of certain development and co-promotion costs, product royalties and product sales.
Under the North America Takeda Agreement, which
has an initial contract term through 2020, and thereafter continues until terminated by Takeda in its sole discretion:
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We recognize product sales revenue from the supply of AMITIZA to Takeda at a negotiated supply
price.
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We recognize royalty income from Takeda’s net sales of AMITIZA in the U.S. and Canada. The
royalty rates consist of several tiers ranging from 18%-26% with the royalty rate resetting every year:
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We recognize research and development revenue for the reimbursement of research and development
costs as Takeda has agreed to fund all development costs, including regulatory-required studies, to a maximum of $50.0 million
for each additional indication and $20.0 million for each additional formulation. Takeda and we have agreed to equally share all
costs in excess of those amounts. With respect to any studies required to modify or expand the label for AMITIZA for the treatment
of CIC, IBS-C or OIC, Takeda has agreed to fund 70% of the costs of such studies, and we have agreed to fund the remainder. Additionally,
Takeda has agreed to fund 100% of the development costs for the new formulation of AMITIZA, and 70% of the development costs for
the treatment of pediatric functional constipation.
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We are eligible for additional commercial milestone payments contingent on the achievement of certain
net sales revenue targets.
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Takeda is required to provide a minimum annual commercial investment during the current term of
the North America Takeda Agreement and may reduce it when a generic equivalent enters the market.
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We retain the right to co-promote AMITIZA for gastrointestinal indications. In December 2014, as
part of the amendments to the North America Takeda Agreement, we ceased our co-promoting activity.
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Our collaboration with Takeda is administered in part by four committees consisting of an equal
number of representatives from both companies. In the case of a deadlock within the joint steering committee, our chief executive
officer has the determining vote on matters arising from the joint development and manufacturing committees, while the chief operating
officer of Takeda has the determining vote on matters arising from the joint commercialization committee.
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During the extended term, beginning on January 1, 2021, we will share equally with Takeda in the
net annual sales revenue from branded AMITIZA sales.
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Global Takeda Agreement
In October 2014, we entered into the Global
Takeda Agreement to develop and commercialize AMITIZA for gastrointestinal indications. The territories excluded from the Global
Takeda Agreement are Canada, the U.S., Japan and the People’s Republic of China. Canada and the U.S. are covered by the North
America Takeda Agreement, Japan is covered by the Japan Mylan Agreement, and China is covered by the China Gloria Agreement. The
agreement is effective until it expires on a country-by-country basis on the fourteenth anniversary of the date of first commercial
sale in that country. Under the terms of the agreement:
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·
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We recognize product sales revenue from the supply of AMITIZA to Takeda at a negotiated supply
price.
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We received an upfront payment of $14.0 million from Takeda in October 2014.
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We are eligible for up to $35.0 million in commercial milestone payments contingent upon the achievement
of certain net sales revenue targets.
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We are responsible for the first $6.0 million in development costs, and Takeda is responsible for
all subsequent development activities and related costs.
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Takeda is, or will become, the marketing authorization holder for each country upon regulatory
approval and will be responsible for all commercialization and regulatory activities.
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Japan Mylan Agreement
In February 2009, we entered into a license,
commercialization and supply agreement (the Japan Mylan Agreement) for AMITIZA in Japan with Mylan. Under the terms of the Japan
Mylan Agreement (which continues until 2027):
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·
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We recognize product sales revenues from the supply of AMITIZA to Mylan at a negotiated supply
price.
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Mylan has a right of first exclusive negotiation to obtain a license to develop and commercialize
AMITIZA in Japan for any new indications that we may develop, such as OIC. We retain the rights to AMITIZA for all other therapeutic
uses. We are required to fund and complete all the development work including any additional clinical studies required to maintain
regulatory approval in Japan. We own all the rights covered under the regulatory filings.
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Mylan is required to fund and undertake all commercialization efforts including pre-launch and
post-launch marketing, promotion and distribution. Mylan is required to maintain the number of sales staff and the estimated level
of annual net sales based on the commercialization plan approved by the committees described below.
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·
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We have retained the right to co-promote the product in Japan under certain conditions and all
other development and commercialization rights to all other therapeutic areas and are responsible for the cost of co-promotion.
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Our collaboration efforts under the Japan Mylan Agreement are administered by two committees consisting
of an equal number of representatives from both parties. In the case of a deadlock within the committees, we have the determining
vote on matters relating to development, while Mylan has the determining vote on matters relating to commercialization.
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China Gloria Agreement
In May 2015, we entered into an exclusive license,
development, commercialization and supply agreement (China Gloria Agreement), for AMITIZA in the People’s Republic of China.
The China Gloria Agreement is effective until the thirteenth anniversary of the effective date and will automatically renew for
successive three year periods unless terminated upon one year’s prior written notice by one of the parties. Under the terms
of the China Gloria Agreement:
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·
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We will recognize product sales revenues as the exclusive supplier of AMITIZA to Gloria at a negotiated
supply price.
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·
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We received an upfront payment of $1.0 million from Gloria in May 2015, and an upfront payment
of $500,000 in June 2015 after the CFDA accepted the IND application for a pivotal trial of AMITIZA in patients with CIC.
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We are eligible to receive an additional payment of $1.5 million upon the occurrence of a specified
regulatory or commercial milestone event.
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Gloria is responsible for all development activities and costs, as well as commercialization and
regulatory activities for AMITIZA in the People’s Republic of China.
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RESCULA Collaboration Agreement
Japan Santen Agreement
In March 2012, we entered into an exclusive
transaction agreement (Japan Santen Agreement) with Santen Pharmaceutical Co. Ltd (Santen) to commercialize RESCULA in Japan. The
initial term of the Japan Santen Agreement ended on March 31, 2016, but the agreement automatically extends for successive one-year
renewal terms unless either party gives an 11-month prior notice. Under the terms of the Japan Santen Agreement we recognize revenues
from the product sales of RESCULA to Santen at a negotiated price.
Pipeline Agreement
CPP Agreement
In January 2016, we entered into an option
and collaboration agreement (the “CPP Agreement”) under which CPP has granted us the sole option to acquire an exclusive
license to commercialize CPP-1X/sulindac combination product in North America. Under the terms of the CPP Agreement:
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We have invested $5.0 million in CPP in the form of a convertible note, with a planned additional
$5.0 million equity investment in CPP’s next qualified financing, which will be either an IPO or a private financing as defined
by the agreement;
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We will pay CPP an option fee of up to $7.5 million, payable in two tranches; the first tranche
of $3.0 million was paid at signing;
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CPP will complete the ongoing phase 3 trial off CPP-1x/sulindac for the treatment of FAP under
the oversight of a joint steering committee;
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Upon exercise of our exclusive option, we would acquire an exclusive license to the product, for
all indications, and would be obligated to pay CPP up to an aggregate of $190.0 million in license fees and milestone payments
upon the achievement of specified clinical development and sales milestones; and
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We and CPP would share equally in profits from the sale of licensed products.
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Intellectual Property
Our success depends in part on our ability
to obtain and maintain proprietary protection for the technology and know-how upon which our products are based, to operate without
infringing the proprietary rights of others and to prevent others from infringing our proprietary rights.
We hold ownership rights to develop and commercialize
our products and product candidates covered by patents and patent applications. Our portfolio of patents includes patents or patent
applications with claims directed to compositions of matter, including both compounds and pharmaceutical formulations, methods
of use, or a combination of these claims, and methods of manufacturing the compounds. Depending upon the timing, duration and specifics
of FDA approval of the use of a compound for a specific indication, some of our U.S. patents may be eligible for a limited patent
term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. Similar
extensions to patent term may be available in other countries for particular patents in Sucampo’s portfolio.
As of December 31, 2016, the patent rights
relating to lubiprostone include compositions of matter, methods of use and methods of manufacturing, and several of the U.S. patents
are listed in the U.S. FDA Orange Book. Patents have been granted in the U.S., Europe, Japanese and other countries relating to
pharmaceutical formulations, manufacturing, dosing regimens and therapeutic uses. Many of the U.S. patents in the lubiprostone
portfolio expire between 2020 and 2027. Many of the corresponding foreign patents expire between 2020 and 2026. Several other patents
have later termination dates.
As of December 31, 2016, the patent rights
relating to unoprostone isopropyl include compositions of matter, methods of use and methods of manufacturing. However, RESCULA
is not covered by patents in Japan, the largest market for the product. Two U.S. patents cover the product, which was discontinued
by Sucampo in the U.S. The U.S. patent relating to compositions of matter expires in 2018 and the patent relating to method of
use expires in 2021. Corresponding foreign patents also expire in this time frame.
We are actively seeking to augment our portfolio
of compounds by focusing on the development of new chemical entities, or NCEs, which have not previously received FDA approval.
Upon approval by the FDA, NCEs are entitled to market and data exclusivity in the U.S. with respect to generic drug competition
for a period of five years from the date of FDA approval, even if the related patents have expired. We are also engaged in patent
lifecycle management strategies for our marketed products.
Manufacturing
Following the acquisition of R-Tech Ueno in
October 2015 we obtained direct control and management of the production and supply chain of commercial quantities of AMITIZA
and RESCULA as well as preclinical or clinical supplies of the other compounds that we are testing in our development programs.
Our manufacturing network is a combination of owned assets and external suppliers. There are existing supply agreements between
R-Tech and our external suppliers to ensure continued supply of our products.
Competition
AMITIZA (lubiprostone)
In the U.S., an estimated 40-50 million patients
who suffer from constipation that is idiopathic in nature or a consequence of other conditions such as IBS or chronic opioid use.
Many patients are currently treated for CIC, IBS-C or OIC with a variety of medications. Over-the-counter (OTC) medications are
available and are generally intended to provide relief for occasional constipation. Prescription products are also available and
are generally intended to provide relief for chronic constipation. As such, the U.S. constipation market is expansive and diverse
with a multitude of products intended to treat a large heterogeneous patient population.
The prescription chronic constipation market
can generally be bifurcated into two categories: 1) generic laxatives and 2) branded products. Generic laxatives make up roughly
80%-90% of the total prescription volume while branded prescriptions have grown to represent 10%-20% of the prescription market.
The branded prescription products are briefly described below:
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AMITIZA (lubiprostone):
AMITIZA, is approved by the FDA for the treatment of CIC (from an
unknown cause; not constipation due to another condition or treatment), IBS-C and CIC. AMITIZA softens the stool by increasing
its water content, so the stool can pass easily. AMITIZA is taken twice daily.
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Linzess (linaclotide): Linzess is approved for CIC and IBS-C. This drug is a capsule taken once
daily and helps relieve constipation by helping bowel movements occur more often. It is not approved for use in those age 17 years
and younger.
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Trulance (Plecanatide): Trulance is approved (but not yet launched as of early March, 2017) for CIC. This drug is a capsule that can
be taken once daily for use in adults, and is a similar mechanism as Linzess (guanylate cyclase type-C agonist).
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Lactulose: Lactulose, a prescription laxative for chronic constipation, draws water into the bowel
to soften and loosen the stool.
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Polyethylene glycol (PEG): PEG is an osmotic laxative for chronic constipation and causes water
to remain in the stool, which results in softer stools.
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Movantik (naloxegol): Movantik is approved for OIC. This drug works by binding to mu-receptors
in the brain and other parts of the central nervous system to block pains signals as well as bind to mu-receptors in the bowel
which may cause OIC.
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Relistor, oral and injectable (methylnaltrexone bromide): Relistor is approved for OIC. Similar
to Movantik, this product works by decreasing the constipating effects of opioids by inhibiting opioids from binding to mu-receptors
in GI tract.
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At this time AMITIZA is the only branded product
that has a unique mechanism of action. AMITIZA is also the only branded product on the market today to be indicated in three separate
indications for CIC, IBS-C and OIC.
AMITIZA Competitors
The key branded and generic products currently
on the U.S. market include:
Product
|
Company
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Approved
Indications
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AMITIZA
(lubiprostone)
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Sucampo/Takeda
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CIC, IBS-C, OIC
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Linzess
(linaclotide)
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Allergan/Ironwood
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CIC, IBS-C
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Trulance
(Plecanatide)
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Synergy Pharmaceuticals
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CIC (approved, not launched)
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Movantik
(naloxegol)
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AstraZeneca
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OIC
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Relistor (Injection and Oral)
(methylnaltrexone bromide)
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Valeant/Progenics
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OIC
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Lactulose
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Several
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CIC, IBIS-C
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Generic PEG
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Several
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Chronic Constipation
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Key pipeline competitors include:
Product
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Company
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Status
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Plecanatide
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Synergy Pharmaceuticals Inc.
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CIC approved January 2017
IBS-C filing expected H1 2017
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Naldemedine
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Shionogi
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OIC Phase III; positive Phase III topline, potential approval expected H1 2017
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Other agents in various stages of development
include
:
Product
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Company
|
Status
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Tenapanor
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Ardelyx
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IBS-C, Phase III
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Linaclotide
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Allergan/Ironwood
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Linaclotide Colonic Release, Phase IIb data announced in December 2016, Phase III-ready
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RM-131/relamorelin
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Ipsen/Rhythm
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CIC, Phase II
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TD-1211/axelopran
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Theravance
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OIC, Phase II
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SP-333/dolcanatide
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Synergy
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OIC, IBD Phase II
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Elobixibat
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Albireo
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CIC Phase III (Japan), Phase II (US)
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Additionally, there are several 5-HT Receptor
agonists in various stages of development as well (Resolor/Shire Phase III in CIC, YKP-10811/SK Biopharma in CIC Phase II)
RESCULA (unoprostone isopropyl)
RESCULA (unoprostone isopropyl) is approved
for Ocular Hypertension and Open-Angle Glaucoma and is currently marketed in several global regions including Japan and Taiwan.
RESCULA was originally launched in Japan in 1994 and is no longer covered by patent or regulatory exclusivity in Japan. RESCULA
is no longer commercialized in the U.S.
According to recent market data in Japan, the
glaucoma treatment market grew 0.9% to ¥105.7 billion. Treatments for glaucoma represent the largest segment of Japan’s
prescription ophthalmic pharmaceutical market, accounting for approximately 33% of the total. Increased intraocular pressure is
a significant risk factor resulting in damage to the optic nerve. This can lead to visual field loss and in some cases, blindness.
Glaucoma is the most common cause of blindness in people with ophthalmic disease in Japan. The glaucoma market is expected
to expand in the future, mainly due to the increase in patient numbers owing to population aging.
RESCULA faces many competitors which promote
products for primary-angle glaucoma (PAOG), and ocular hypertension. There are several products in the regions where RESCULA is
marketed that have become generic and have therefore had an impact on the usage of prostaglandins as first line therapy. Other
competitive products include latanaprost and travoprost, ophthalmic solutions and suspensions and generic beta blockers. Prostaglandin
analogues continue to have strong first line market share followed by generic beta blockers. Our competitors are also developing
additional pipeline products for PAOG and ocular hypertension.
Product Candidates
We face similar competition from approved therapies
and potential pipeline products for the diseases and conditions potentially addressed by our product candidates, and are likely
to face competition for any other product candidates we may elect to develop in the future.
Government Regulation
Government authorities in the U.S., at the
federal, state and local level, and in other countries extensively regulate the research, development, testing, approval, manufacturing,
labeling, post-approval monitoring and reporting, packaging, promotion, storage, advertising, distribution, marketing and export
and import of pharmaceutical products such as those we are developing. The process of obtaining regulatory approvals and the subsequent
compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time
and financial resources.
United States Government Regulation
In the U.S., the FDA regulates drugs under
the Federal Food, Drug, and Cosmetic Act, as amended, and implements regulations. The FDA has jurisdiction over all of our products
and administers requirements covering the safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing,
advertising, dissemination of information, post-marketing study, and pharmacovigilance of our pharmaceutical products. Information
that must be submitted to the FDA in order to obtain approval to market a drug varies depending upon whether the drug is a new
product whose safety and efficacy have not previously been demonstrated in humans or a drug whose active ingredients and certain
other properties are the same as those of a previously approved drug. The results of product development, preclinical studies and
clinical trials must be submitted to the FDA as part of the approval process. The FDA may deny approval if the applicable regulatory
criteria are not satisfied, or it may require additional clinical data or analyses or even an additional clinical trial. Even if
such data are submitted, the FDA may ultimately decide that the application does not satisfy the criteria for approval.
Obtaining FDA approval for new products and
manufacturing processes can take a number of years and involve the expenditure of substantial resources. To obtain FDA approval
for the commercial sale of a therapeutic agent, the potential product must undergo testing programs on animals, the data from which
is used to file an investigational NDA with the FDA. In addition, there are three phases of human testing following Good Clinical
Practices (GCP) guidelines:
-
Phase 1 consists of safety tests with human clinical evaluations, generally in normal, healthy volunteers;
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Phase 2 programs expand safety tests and measure efficacy along with dose finding evaluations and are
conducted in volunteers with a particular disease condition that the drug is designed to treat; and
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Phase 3 programs are greatly expanded clinical trials to determine the effectiveness of the drug at a
particular dosage level in the affected patient population.
The data from these clinical tests are combined
with data regarding chemistry, manufacturing and animal pharmacology and toxicology, and are then submitted to the FDA in the form
of an NDA. The preparation of an NDA requires the expenditure of substantial funds and the commitment of substantial resources.
Failure to comply with the applicable FDA requirements
at any time during the product development process, approval process or following approval may result in administrative or judicial
sanctions. These sanctions could include the FDA’s imposition of a hold on clinical trials, refusal to approve pending applications,
withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution,
injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse
effect on our business.
The FDA extensively regulates all aspects of
manufacturing quality under its current good manufacturing practice (cGMP) regulations. The FDA inspects the facility or the facilities
at which drug products are manufactured. The FDA will not approve the product unless cGMP compliance is satisfactory. If the FDA
determines the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies
in the application and often will request corrective actions including additional validation or information.
The pharmaceutical testing and approval process
requires substantial time, effort and financial resources. Data obtained from clinical activities are not always conclusive and
may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval
on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental
approvals, which could delay or preclude us from marketing our products. The FDA may limit the indications for use or place other
conditions on any approvals that could restrict the commercial application of the products. After approval, some types of changes
to the approved product, such as manufacturing changes and additional labeling claims, are subject to further FDA review and approval.
Post-Approval Requirement
After regulatory approval of a product is obtained,
we are obligated to comply with a number of post-approval requirements. For example, the FDA may require post marketing, or phase
4 clinical trials to assess additional elements of the product’s safety or efficacy. In addition, holders of an approved
NDA are required to report certain adverse drug reactions and production problems to the FDA, to provide updated safety information
and to comply with requirements concerning advertising and promotional labeling for their products. The FDA periodically inspects
manufacturing facilities to assess compliance with cGMP, which imposes certain fiscal, procedural, substantive and record-keeping
requirements.
We rely substantially on third parties for
the performance of certain activities related to the production, packaging and distribution of our drug products for clinical and
commercial use. Future FDA inspections may identify compliance issues at our facilities or at the facilities of our manufacturers
that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with
a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder
of an approved NDA, including withdrawal or recall of the product from the market or other voluntary, FDA-initiated or judicial
action that could delay or prohibit further marketing. Newly discovered or developed safety or effectiveness data may require changes
to a product’s approved labeling, including the addition of new warnings, precautions and contraindications. Also, new government
requirements, including those resulting from new legislation, may be established that could delay or prevent regulatory approval
of our products under development.
Regulation Outside of the United States
In addition to regulations in the U.S., we
are subject to a variety of regulations in other jurisdictions most notably by the Health Canada in Canada, European Medicines
Agency (EMA) in the E.U., Swissmedic in Switzerland and the MHLW in Japan. Whether or not we obtain FDA approval for a product,
we must obtain approval by the comparable regulatory authorities of countries outside the U.S. before we can commence clinical
trials or marketing of the product in those countries. The requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary greatly from country to country, and the time for approval is country dependent and may be longer
or shorter than that required by the FDA.
Canada
In Canada, the new drug approval process is
similar to that in the U.S. The process is divided into four phases: preclinical studies, clinical trials, new drug submission
and marketing. Health Canada regulates the clinical trials and grants market authorization based on an assessment of the safety,
efficacy and quality of drug products. In addition to approval of new drugs, the federal government also regulates drug pricing
through the Patented Medicines Prices Review Board (PMPRB).
Europe
In Europe, medicinal products are governed by
a framework of E.U. directives which apply across all E.U. member states. To obtain regulatory approval of a drug under the E.U.
regulatory system, we may submit an MAA, either under a centralized, decentralized, or mutual recognition procedure (MRP). The
centralized procedure, which is compulsory for medicines produced by certain biotechnological processes and optional for those
which are innovative, provides for the grant of a single marketing authorization that is valid for all E.U. member states. The
decentralized procedure provides for a member state, known as the reference member state, to assess an application, with one or
more concerned, member states subsequently approving that assessment. The MRP provides approval in one country and then allows
for a request from subsequent countries to mutually recognize the original country’s approval. The E.U. also governs among
other areas, the authorization and conduct of clinical trials, the marketing authorization process for medical products, manufacturing
and import activities, and post-authorization activities including pharmacovigilance. The E.U. has established regulations on pediatric
medicines which impose certain obligations on pharmaceutical companies with respect to the investigation of their products in children.
Japan
In Japan, pre-marketing approval and clinical
studies are required for all pharmaceutical products. The regulatory requirements for pharmaceuticals in Japan have in the past
been so lengthy and costly that it has been cost-prohibitive for many pharmaceutical companies. Historically, Japan has required
that pivotal clinical data submitted in support of a NDA be performed on Japanese patients. Recently, however, as a part of the
global drug harmonization process, Japan has signaled a willingness to accept U.S. or E.U. patient data when submitted along with
a bridging study, which demonstrates that Japanese and non-Japanese subjects react comparably to the product. This approach, which
is executed on a case-by-case basis, may reduce the time required for approval and introduction of new products into the Japanese
market. To obtain manufacturing/marketing approval, we must submit an application for approval to the MHLW with results of nonclinical
and clinical studies to show the quality, efficacy and safety of a new drug. A data compliance review, GCP on-site inspection,
cGMP audit and detailed data review are undertaken by the PMDA. The application is then discussed by the committees of the Pharmaceutical
Affairs and Food Sanitation Council (PAFSC). Based on the results of these reviews, the final decision on approval is made by MHLW.
After the approval, negotiations regarding the reimbursement price with MHLW will begin. The price will be determined within 60
to 90 days unless the applicant disagrees, which may result in extended pricing negotiations.
Regulation of the Health Care Industry
In addition to the regulatory approval requirements
described above, we are or will be directly or indirectly through our customers, subject to extensive regulation of the health
care industry by the federal and state government and foreign countries in which we may conduct our business. The laws that directly
or indirectly affect our ability to operate our business include the following:
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The federal Medicare and Medicaid Anti-Kickback laws, which prohibit persons from knowingly and willfully
soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral
of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid programs;
-
Other Medicare laws, regulations, rules, manual provisions and policies that prescribe the requirements
for coverage and payment for services performed by our customers, including the amount of such payment;
-
The federal False Claims Act which imposes civil and criminal liability on individuals and entities who
submit, or cause to be submitted, false or fraudulent claims for payment to the government;
-
The False Claims Act which prohibits knowingly and willfully falsifying, concealing or covering up a
material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items
or services;
-
The Foreign Corrupt Practices Act (FCPA), which prohibits certain payments made to foreign government
officials;
-
State and foreign law equivalents of the foregoing and state laws regarding pharmaceutical company marketing
compliance, reporting and disclosure obligations; and
-
The Patient Protection and Affordable Care Act (ACA), which among
other things changes access to healthcare products and services; creates new fees for the pharmaceutical and medical device industries;
changes rebates and prices for health care products and services; and requires additional reporting and disclosure.
If our operations are found to be in violation
of any of these laws, regulations, rules or policies or any other law or governmental regulation, or if interpretations of the
foregoing change, we may be subject to civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs
and the curtailment or restructuring of our operations.
Pharmaceutical Pricing and Reimbursement
In the U.S. and other countries, sales of any
products for which we receive regulatory approval for commercial sale will depend in part on the availability of reimbursement
from third-party payers. Third-party payers include government health administrative authorities, managed care providers, pharmacy
benefit managers, private health insurers and other organizations. These third-party payers are increasingly challenging the price
and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement
status of newly approved healthcare product candidates. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate
the cost-effectiveness of our products. Our products may not be considered cost-effective. 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.
United States
Federal, state and
local governments in the U.S. continue to work towards significant legislation aimed to limit the growth of healthcare costs, including
the cost of prescription drugs. Following the U.S. Supreme Court decision in June 2012 upholding the Patient Protection and Affordable
Care Act there has been an increase in the pace of regulatory issuances by those U.S. government agencies designated to carry out
the extensive requirements of the ACA. These regulatory actions are expected to have both positive and negative impacts on the
U.S. healthcare industry, although uncertainty remains regarding the ACA’s ultimate effects. This legislation has both current
and long term impacts on us. The provisions of the U.S. Healthcare Reform Act are effective on various dates over the next several
years.
Medicaid is a joint
federal and state program that is administered by the states for low income and disabled beneficiaries. Under the Medicaid Drug
Rebate Program, we are required to pay a rebate for each unit of product reimbursed by the state Medicaid programs. The amount
of the rebate for each product is set by law as the greater of 23.1% of the average manufacturer price (AMP) or the difference
between AMP and the best price available from us to any customer (with limited exceptions). The rebate amount must be adjusted
upward if AMP increases more than inflation (measured by the Consumer Price Index - Urban). The adjustment can cause the rebate
amount to exceed the minimum 23.1% rebate amount. The rebate amount is calculated each quarter based on our report of current AMP
and best price for each of our products to the Centers for Medicare & Medicaid Services. The requirements for calculating AMP
and best price are complex. We are required to report any revisions to AMP or best price previously reported within a certain period,
which revisions could affect our rebate liability for prior quarters. In addition, if we fail to provide information timely or
we are found to have knowingly submitted false information to the government, the statute governing the Medicaid Drug Rebate Program
provides for civil monetary penalties.
Medicare is a federal
program that is administered by the federal government that covers individuals age 65 and over as well as those with certain disabilities.
Medicare Part D provides coverage to enrolled Medicare patients for self-administered drugs (
i.e
., drugs that do not need
to be injected or otherwise administered by a physician). Medicare Part D is administered by private prescription drug plans approved
by the U.S. government and each drug plan establishes its own Medicare Part D formulary for prescription drug coverage and pricing,
which the drug plan may modify from time-to-time. The prescription drug plans negotiate pricing with manufacturers and may condition
formulary placement on the availability of manufacturer discounts. Manufacturers, including us, are required to provide a 50% discount
on brand name prescription drugs utilized by Medicare Part D beneficiaries when those beneficiaries reach the coverage gap in their
drug benefits.
Our products are subject
to discounted pricing when purchased by federal agencies via the Federal Supply Schedule (FSS). FSS participation is required for
our products to be covered and reimbursed by the Veterans Administration (VA) Department of Defense, (DoD), Coast Guard, and Public
Health Service (PHS). Coverage under Medicaid, the Medicare Part B program and the PHS pharmaceutical pricing program is also conditioned
upon FSS participation. FSS pricing is negotiated periodically with the Department of Veterans Affairs. FSS pricing is intended
not to exceed the price that we charge our most-favored non-federal customer for a product. In addition, prices for drugs purchased
by the VA, DoD (including drugs purchased by military personnel and dependents through the TriCare retail pharmacy program), Coast
Guard, and PHS are subject to a cap on pricing equal to 76.0% of the non-federal average manufacturer price, or non-FAMP. An additional
discount applies if non-FAMP increases more than inflation (measured by the Consumer Price Index - Urban). In addition, if we fail
to provide information timely or we are found to have knowingly submitted false information to the government, the governing statute
provides for civil monetary penalties in addition to other penalties available to the government.
To maintain coverage
of our products under the Medicaid Drug Rebate Program, we are required to extend discounts to certain purchasers under the PHS
pharmaceutical pricing program. Purchasers eligible for discounts include hospitals that serve a disproportionate share of financially
needy patients, community health clinics and other entities that receive health services grants from the PHS.
Canada
The purpose of the
PMPRB is to ensure that prices of patented and non-patented medicines are not excessive. Accordingly, the PMPRB monitors and reports
prices of non-patented drugs and publishes annual reports on the prices using international median prices as a benchmark. The PMPRB
does not set drug prices, analyze relative cost effectiveness or value of new drugs or take an active role in formulary listing
and reimbursement pricing as these responsibilities are assumed either by the provinces and territories. In order to determine
whether the price for a given drug is “excessive”, new drugs are labelled in one of three categories: Category 1 refers
to line extensions of existing medicines. The price of a Category 1 drug is presumed excessive if it does not bear a reasonable
relationship to the price of other medicines of the same strength sold by the patentee; Category 2 refers to breakthrough or substantial
improvements over existing drugs. The price of a Category 2 drug is presumed excessive if it exceeds the prices of all the medicines
in the same therapeutic class or the median of the prices in seven countries (France, Germany, Italy, Sweden, Switzerland, the
U.K. and the U.S.). Category 3 refers to new chemical entities offering moderate, little or no therapeutic improvement. The price
of a Category 3 drug is presumed excessive if it exceeds the prices of all the medicines in the same therapeutic class. The PMPRB
also monitors the price of existing drugs, which is considered excessive if it exceeds the increase in the general Canadian Consumer
Price Index. When manufacturers set the price of a patented medicine too high, the PMPRB first attempts to have the manufacturer
reduce the price voluntarily. Barring this, it can hold a public hearing into the price following which it can order the manufacturer
to reduce the price, withdraw the manufacturer’s market authorization, or impose a fine equal to or double the amount of
the excessive increase in price.
Europe
Different pricing and reimbursement schemes
exist in other countries. In Europe, governments influence the price of pharmaceutical products through their pricing and reimbursement
rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach
taken varies from state to state. Some jurisdictions permit products to be marketed only after a reimbursement price has been agreed.
Other states allow companies to fix their own prices for medicines, but monitor company profits. In some cases, pharmacoeconomic
analyses from clinical studies and other available resources are used to establish pricing using risk-benefit comparisons with
currently available products.
In the U.K., pharmaceutical companies set their
own price, and then national bodies (
e.g.
, NICE and Scottish Medicines Consortium), sub-national bodies (
e.g.
, Greater
Manchester Medicines Management Group and London Procurement Partnership), or local bodies (
e.g
., Clinical Commissioning
Groups and Health Boards) will determine if a medicine is cost-effective. The national and sub-national bodies advise local bodies,
which are greatly influenced by a NICE endorsement; however, ultimately the decision to pay for a medicine is made at a local level
in the U.K.
In Switzerland, the Swiss health care system
is a compulsory private system where patients pay a monthly variable fee to a registered health insurance fund. All insurers reimburse
against a common national formulary, the SL. The BAG makes the decisions on reimbursement and pricing of all prescription drugs
in the market with their review taking three to four months. For new drugs, it is not uncommon for there to be several rounds of
review. It also conducts regular price reviews of the drugs on the formulary. The Federal Commission on drugs or Arzneimittelkommission
(EAK) is a body assisting the BAG with expert advice. Once a product is approved the BAG, in consultation with EAK, decides whether
or not the drug will appear on the SL. After EAK’s evaluation of a drug, BAG and EAK decide on the maximum price in the market.
The criteria used are:
-
Internal comparison with reimbursed and non-reimbursed therapeutic equivalents,
-
External cross country comparison (reference countries: Denmark, Germany, the U.K. and the Netherlands),
and
-
Cost benefit analysis
Japan
In Japan, pricing is established utilizing
various information including reference prices from other international markets. However, the MHLW biannually reviews the pharmaceutical
prices of individual products. In the past, these reviews have resulted in price reductions. We expect similar price reviews in
the future, in line with the government’s previously announced plan for controlling health care costs. It is not possible
to predict the outcome of these reviews, and it is possible that Japanese authorities will again reduce drug reimbursement rates,
which could adversely affect the reimbursement levels for our products or product candidates.
Regulation Pertaining
to Sales and Marketing
We are subject to
various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false
claims laws. Anti-kickback laws generally prohibit a prescription drug manufacturer from soliciting, offering, receiving, or paying
any remuneration to generate business, including the purchase or prescription of a particular drug. Although the specific provisions
of these laws vary, their scope is generally broad and there may be no regulations, guidance or court decisions that clarify how
the laws apply to particular industry practices. There is therefore a possibility that our practices might be challenged under
the anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be
presented for payment to third party payers (including Medicare and Medicaid), claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services.
Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. Violations of fraud
and abuse laws may be punishable by criminal or civil sanctions, including fines and civil monetary penalties, and exclusion from
federal health care programs (including Medicare and Medicaid). Federal and state authorities are paying increased attention to
enforcement of these laws within the pharmaceutical industry and private individuals have been active in alleging violations of
the laws and bringing suits on behalf of the government under the federal False Claims Act. If we were subject to allegations concerning,
or were convicted of violating, these laws, our business could be harmed.
Laws and regulations
have been enacted by the federal government and various states to regulate the sales and marketing practices of pharmaceutical
manufacturers. The laws and regulations generally limit financial interactions between manufacturers and health care providers
or require disclosure to the government and public of such interactions. The laws include federal “sunshine” provisions
enacted in 2010 as part of the comprehensive federal health care reform legislation. The sunshine provisions apply to pharmaceutical
manufacturers with products reimbursed under certain government programs and require those manufacturers to disclose annually to
the federal government (for re-disclosure to the public) certain payments made to physicians and certain other healthcare practitioners
or to teaching hospitals. State laws may also require disclosure of pharmaceutical pricing information and marketing expenditures.
Many of these laws and regulations contain ambiguous requirements. Given the lack of clarity in laws and their implementation,
our reporting actions could be subject to the penalty provisions of the pertinent federal and state laws and regulations. Outside
the U.S., other countries have implemented requirements for disclosure of financial interactions with healthcare providers and
additional countries may consider or implement such laws.
Other Regulations
Foreign Anti-Corruption
We are subject to
various federal and foreign laws that govern our international business practices with respect to payments to government officials.
Those laws include the U.S. Foreign Corrupt Practices Act which prohibits U.S. companies and their representatives from paying,
offering to pay, promising, or authorizing the payment of anything of value to any foreign government official, government staff
member, political party, or political candidate for the purpose of obtaining or retaining business or to otherwise obtain favorable
treatment or influence a person working in an official capacity. In many countries, the health care professionals we regularly
interact with may meet the Foreign Corrupt Practices Act (FCPA) definition of a foreign government official. The FCPA also requires
public companies to make and keep books and records that accurately and fairly reflect their transactions and to devise and maintain
an adequate system of internal accounting controls.
The laws to which
we are subject also include the U.K. Bribery Act 2010 (Bribery Act) which proscribes giving and receiving bribes in the public
and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other
agents from giving bribes. U.S. companies that conduct business in the U.K. generally will be subject to the Bribery Act. Penalties
under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain
circumstances.
Other Laws
Our present and future
business has been and will continue to be subject to various other laws and regulations. Various laws, regulations and recommendations
relating to safe working conditions, laboratory practices, the experimental use of animals, and the purchase, storage, movement,
import and export and use and disposal of hazardous or potentially hazardous substances used in connection with our research work
are or may be applicable to our activities. Certain agreements entered into by us involving exclusive license rights may be subject
to national or international antitrust regulatory control, the effect of which cannot be predicted. The extent of government regulation,
which might result from future legislation or administrative action, cannot accurately be predicted.
Employees
As of March 1, 2017, we had 139 full-time employees,
including 63 with doctoral or other advanced degrees. Of our workforce, 94 employees are engaged in research, development and manufacturing,
and 45 are engaged in business development, legal, finance, administration and sales and marketing. None of our employees are represented
by a labor union or covered by collective bargaining agreements. We have never experienced a work stoppage and believe our relationship
with our employees is good.
Research and Development
For information regarding research and development
expenses incurred during 2016, 2015 and 2014, see Item 7, “
Management Discussion and Analysis of Financial Condition and
Results of Operations—Research and Development Expenses
”.
Financial Information About Geographic Areas
Consolidated revenues by geographic area where
derived were as follows:
|
|
Years Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
140,240
|
|
|
$
|
95,769
|
|
|
$
|
74,688
|
|
Japan
|
|
|
83,130
|
|
|
|
55,371
|
|
|
|
32,128
|
|
Rest of the world
|
|
|
6,686
|
|
|
|
2,040
|
|
|
|
8,634
|
|
Total
|
|
$
|
230,056
|
|
|
$
|
153,180
|
|
|
$
|
115,450
|
|
Total revenues generated outside the U.S. were
$89.8 million, $57.4 million and $40.8 million in the years ended December 31, 2016, 2015 and 2014, respectively.
Property and equipment, net by geographic area
where located was as follows:
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
3,065
|
|
|
$
|
3,105
|
|
|
$
|
566
|
|
Japan
|
|
|
3,119
|
|
|
|
3,232
|
|
|
|
114
|
|
Rest of the world
|
|
|
32
|
|
|
|
56
|
|
|
|
83
|
|
Total
|
|
$
|
6,216
|
|
|
$
|
6,393
|
|
|
$
|
763
|
|
Our Class Capital Structure
We have two classes of common stock authorized;
class A common stock and class B common stock. In 2012, our then-majority stockholder and only holder of our class B common stock
converted all outstanding shares of our class B common stock into shares of our class A common stock. We are not authorized to
issue additional shares of class B common stock except in limited circumstances. As a result of the conversion, there is now only
a single class of outstanding common stock, class A common stock, which is entitled to one vote per share.
Our Corporate Information
We were incorporated under the laws of Delaware
in December 1996.
The following is a list of our direct and indirect
subsidiaries as of December 31, 2016:
Subsidiary
|
|
State or other jurisdiction of incorporation or organization
|
Sucampo Pharma Americas, LLC
|
|
Delaware
|
Sucampo LLC
|
|
Delaware
|
Sucampo AG
|
|
Switzerland
|
Sucampo Pharma, LLC
|
|
Japan
|
Sucampo Pharma Europe Ltd.
|
|
United Kingdom
|
Sucampo Acquisitions GmbH
|
|
Switzerland
|
Our principal executive offices are located
at 805 King Farm Boulevard, Suite 550, Rockville, Maryland 20850, and our telephone number is (301) 961-3400.
Website Access to United States Securities and Exchange Commission
Reports
Our Internet address is http://www.sucampo.com.
Through our website, we make available, free of charge, access to all reports filed with the U.S. Securities and Exchange Commission
(SEC) including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments
to these reports, as filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended (Exchange Act), as soon as reasonably practicable after we electronically file such material with, or furnish it to,
the SEC. Copies of any materials we file with, or furnish to, the SEC can also be obtained free of charge through the SEC’s
website at http://www.sec.gov or at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549.
You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Before deciding to purchase, hold or sell
our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks
described elsewhere and the other information contained in this report and in our other filings with the SEC, including subsequent
Quarterly Reports on Forms 10-Q and Current Reports on Form 8-K. We operate in a rapidly changing environment that involves numerous
risks. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also affect our business. These known and unknown risks could materially and
adversely affect our business, financial condition, prospects, operating results or cash flows.
Risks Related to Our Business and Industry
If we are unable to continue successful commercialization
of AMITIZA for the approved indications and other indications or dosage forms for which we are developing this drug, or experience
significant delays in doing so, our ability to generate royalty and product-based revenues and achieve profitability will be jeopardized.
Our business currently depends entirely on
the successful commercialization of our first product, lubiprostone. Lubiprostone was launched in the U.S. in 2006 under the brand
name AMITIZA. AMITIZA is currently marketed in the U.S., U.K., Switzerland and Japan for various indications. We have a limited
history of generating global revenues from the sale of lubiprostone. Prior to the acquisition of R-Tech (the Acquisition), R-Tech
was responsible for the manufacture and supply of all of our drug products for commercial use and clinical development. Through
the Acquisition, we obtained control over the manufacturing and supply chain of AMITIZA. This increased responsibility could detract
attention from operating the day-to-day components of our business prior to the Acquisition.
Our ability to meet expectations with respect
to global sales of lubiprostone and revenues from such sales, and to attain profitability and maintain positive cash flow from
the lubiprostone business, in the time periods we anticipate, or at all, will depend on a number of factors, including the following:
|
·
|
our and our partners’ ability to continue to build, and to maintain, market acceptance for
lubiprostone among healthcare professionals and patients in the U.S., and to gain such market acceptance in the countries where
lubiprostone is approved, or may in the future receive approval;
|
|
·
|
the efforts of Takeda and Mylan to commercialize and maximize net sales revenue of AMITIZA;
|
|
·
|
the degree to which both physicians and patients determine that the safety and side effect profiles
of lubiprostone are manageable, and that the benefits of lubiprostone outweigh the risks;
|
|
·
|
the current and future prevalence of CIC, IBS-C, OIC, or chronic constipation;
|
|
·
|
the willingness of insurance companies, managed care organizations, other private payers, and government
entities that provide reimbursement for medical costs in the U.S. to continue to provide reimbursement for lubiprostone at the
prices at which we offer lubiprostone without imposing any additional major hurdles to access or other significant restrictions
or limitations, and the ability and willingness of patients to commit to any co-pay amounts for lubiprostone applicable under their
insurance coverage;
|
|
·
|
our commercial partners’ ability to obtain pricing approval and/or reimbursement required
for selling lubiprostone in the major countries of the E.U., Japan and in other countries in which we may receive approval to market
lubiprostone on a timely basis and at price levels that are acceptable to us without the applicable government agencies or other
payers in such countries imposing onerous caps, rebate, risk sharing or other requirements which effectively and significantly
lower the reimbursement rates for lubiprostone;
|
|
·
|
the extent of the likely negative impact of the introduction of new competitive products on sales
of lubiprostone;
|
|
·
|
our ability to gain regulatory approval of lubiprostone outside the countries in which we have
already received approval without restrictions that are substantially more onerous or manufacturing specifications that are more
difficult to consistently achieve than those imposed in the U.S. and E.U.;
|
|
·
|
our ability to accurately forecast revenues from sales of lubiprostone and the metrics that impact
revenues, such as prescription rate, short-term and long-term drop-out rate, conversion rate, reimbursement and pricing; the timing
and availability of named patient sales and the impact of future competition;
|
|
·
|
our ability to successfully gain approval of a dosage form of lubiprostone for pediatric functional
constipation, and to generate revenues from sales of the dosage form for pediatric functional constipation, if approved;
|
|
·
|
successful completion of clinical trials of AMITIZA for the treatment of other constipation-related
gastrointestinal indications beyond CIC, IBS-C and OIC as well as other dosage forms other than the 24 mcg and 8 mcg soft gelatin
capsule, and successful commercialization of these indications and dosage forms within and outside the U.S.;
|
|
·
|
our ability to manufacture sufficient bulk quantities of active pharmaceutical ingredient and sufficient
quantities of each dosage strength and dosage form of lubiprostone to meet demand;
|
|
·
|
our ability to hire and retain key personnel necessary to optimize the lubiprostone business; and
|
|
·
|
our and our partners’ ability to continue to execute effectively on key activities related
to lubiprostone in the U.S. and to launch lubiprostone successfully in those key markets outside the U.S. in which we receive pricing
and reimbursement approval, and the level of cost required to conduct such activities.
|
AMITIZA faces significant competition from competitors’
products such as Linzess (marketed) and Trulance
(approved, to launch
in H1 2017), which, in addition to other factors, could in certain circumstances lead to a significant reduction in royalty revenues
and product sales.
As a general matter, the pharmaceutical industry
is highly competitive. To be successful, we must be able to, among other things, effectively discover, develop, test and obtain
regulatory approvals for products. We or our partners must be able to effectively commercialize, market and promote approved products,
including communicating the effectiveness, safety and value of products to actual and prospective customers and medical professionals.
Many of our competitors have greater resources than we have. This enables them, among other things, to make greater investments
in research and development, marketing and promotion.
Our product, AMITIZA, faces competition from
competitors’ products. Specifically, AMITIZA faces competition from linaclotide which, in the U.S. and Canada, is approved
for two of the three indications for which AMITIZA has been approved, and, in certain European countries, is approved for IBS-C.
Its manufacturer is seeking approval in other markets for IBS-C that we currently or intend to market AMITIZA. We also face competition
from naloxegol which is approved for OIC in the U.S. and E.U. Competitor products such as linaclotide and naloxegol may be more
effective or more effectively marketed and sold than AMITIZA is by our partners or by us. Alternatively, in the case of generic
competition, including the generic availability of competitors’ branded products, they may be equally safe and effective
products that are sold at a substantially lower price than our products. As a result, if we fail to maintain our competitive position,
this could have a material adverse effect on our business, cash flow, results of operations, financial position and prospects.
Developments by our competitors, the entry
of new competitors into the markets in which we compete, or consolidation in the pharmaceutical industry could make our products
or technologies less competitive or obsolete. Our future growth depends, in part, on our ability to develop and introduce products
which are more effective than those developed by our competitors. Royalties or sales from our existing products may decline rapidly
if a new product is introduced that represents a substantial improvement over our existing products.
Our future success depends upon our ability to develop new
products, and new indications for existing products, that achieve regulatory approval for commercialization.
For our business model to be successful, we
must continually develop, manufacture and commercialize new products or achieve approval for new indications or label extensions
for the use of our existing products. Prior to commercialization, these new products and product indications must satisfy stringent
regulatory standards and receive requisite approvals or clearances from regulatory authorities in the U.S. and other countries.
The development, regulatory review and approval, and commercialization processes are time consuming, costly and subject to numerous
factors that may delay or prevent the development, approval or clearance, and commercialization of new products, including legal
actions brought by our competitors. To obtain approval or clearance of new indications or products, we must submit, among other
information, the results of preclinical and clinical studies on the new indication or product candidate to the applicable regulatory
authorities. The number of preclinical and clinical studies that will be required for regulatory approval varies depending on the
regulatory authority, the new indication or product candidate, the disease or condition for which the new indication or product
candidate is in development and the regulations applicable to that new indication or product candidate. Even if we believe that
the data collected from clinical trials of new indications for our existing products or for our product candidates are promising,
applicable regulatory authorities may find such data to be insufficient to support approval of the new indication or product. The
regulatory authority can delay, limit or deny approval or clearance of a new indication or product candidate for many reasons,
including:
|
•
|
the product is not safe or effective either generally or for a new indication;
|
|
•
|
our preclinical and clinical data is interpreted in different ways than we interpret that data;
|
|
•
|
we may be required to perform post-marketing clinical studies; or
|
|
•
|
there may be changes in the approval policies or adoption of new regulations.
|
Products that we are currently developing,
other future product candidates or new indications or label extensions for our existing products, may or may not receive the regulatory
approvals or clearances necessary for marketing or may receive such approvals or clearances only after delays or unanticipated
costs.
We continue to rely on third parties for the successful commercialization
of our drug products. The success of these third parties will affect our ability to continue to develop new drug candidates.
For most of our operating history, we have
been a research and development company. As we continue to expand our management, organizational and operational capabilities,
expand our global partnerships, develop our diversified product pipeline, acquire non-prostone clinical candidates, and enhance
our capital structure, our operations will focus on organizing and staffing our company, building the necessary infrastructure
to support these capabilities, developing the pipeline assets which we may acquire, undertaking preclinical and clinical trials
of our product candidates, and pursuing the regulatory approval processes for additional indications for AMITIZA. Though we will
continue to rely upon Takeda and Mylan to commercialize AMITIZA in most of the world, we may not be able to cause these third parties
to effectively market and sell AMITIZA. In addition, we may encounter unforeseen expenses, difficulties, complications and delays
as Takeda obtains regulatory approvals and establishes the commercial markets for AMITIZA outside of North America, Japan and China.
As we continue to develop and seek regulatory approval of our product candidates, both within and outside the U.S., it could be
difficult for us to access capital, to build the necessary infrastructure, to obtain and devote the resources necessary to obtain
and develop product candidates, to effectively sell our products, and to provide resources to support commercialization of our
products.
We are subject to on-going obligations to monitor the safety
of our products and product candidates. Any failure to meet these obligations could adversely affect our ability to generate revenue.
Safety problems or signals can arise as our
products are marketed and our product candidates are evaluated in clinical trials. With our collaborators, we are required to continuously
collect and assess adverse events reported to us and to communicate to regulatory agencies these adverse events and safety signals
regarding our products. Regulatory agencies periodically perform inspections of our pharmacovigilance processes, including our
adverse event reporting. If regulatory agencies determine that we or our collaborators have not complied with the applicable reporting
or other pharmacovigilance requirements, we may become subject to additional inspections, warning letters or other enforcement
actions, including monetary fines, marketing authorization withdrawal and other penalties.
We face potential product liability exposure, and, if claims
are brought against us, we may incur substantial liability.
The use of lubiprostone or any other product
candidate in clinical trials and the sale of AMITIZA or any other product candidate for which we obtain marketing approval expose
us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers
or others selling or otherwise coming into contact with our product and product candidates. If we cannot successfully defend ourselves
against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome,
product liability claims may result in:
|
·
|
decreased demand for lubiprostone or any other product candidate for which we obtain marketing approval;
|
|
·
|
impairment of our business reputation and exposure to adverse publicity;
|
|
·
|
increased warnings on product labels;
|
|
·
|
withdrawal of clinical trial participants;
|
|
·
|
costs as a result of related litigation;
|
|
·
|
distraction of management’s attention from our primary business;
|
|
·
|
substantial monetary awards to patients or other claimants;
|
|
·
|
the inability to successfully commercialize lubiprostone or any other product candidate for which
we obtain marketing approval.
|
We have obtained product liability insurance
coverage for both our clinical trials and our commercial exposures. However, our insurance coverage may not be sufficient to reimburse
us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, 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 due
to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side
effects or warnings found to be inadequate. The cost of any product liability litigation or other proceedings, even if resolved
in our favor, could be substantial. A product liability claim or series of claims brought against us could cause our stock price
to decline and, if the claim is successful and judgments exceed our insurance coverage, could decrease our cash and adversely affect
our business.
Recent federal legislation, including potentially unfavorable
pricing regulations or other healthcare reform initiatives, and other negative pricing trends could limit our ability to generate
revenues.
In March 2010, the Patient Protection and Affordable
Care Act (ACA) was enacted in the U.S. In 2012, the U.S. Supreme Court upheld the ACA. This legislation may have both immediate
and long-term impacts on us. A number of the provisions of legislation require rulemaking action by governmental agencies to implement,
many of which have not yet occurred. The laws change access to health care products and services and create new fees for the pharmaceutical
and medical device industries. Future rulemaking could increase rebates, reduce prices or the rate of price increases for health
care products and services, or require additional reporting and disclosure. Additionally, we cannot predict the impact of uncertainty
regarding the potential repeal of the ACA may have on us nor can we predict the timing or impact of any legislation or future rulemaking.
The regulations that govern, among other things,
regulatory approvals, coverage, pricing and reimbursement for new drug products vary widely from country to country. In the United
States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding
the healthcare system that could prevent or delay regulatory approval of our product candidates, restrict or regulate post-approval
activities and affect our ability to successfully sell any product candidates for which we obtain regulatory approval.
In the U.S., the E.U., and other potentially
significant markets for our product candidates, government authorities and third-party payers are increasingly attempting to limit
or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted
in lower average selling prices. Furthermore, the increased emphasis on managed healthcare in the U.S. and on country and regional
pricing and reimbursement controls in the E.U. will put additional pressure on product pricing, reimbursement and usage, which
may adversely affect our future product sales and results of operations. These pressures can arise from rules and practices of
managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform,
pharmaceutical reimbursement policies and pricing in general.
We may generate growth through acquisitions and in-licensing
and such strategy may not be successful if we are not able to identify suitable acquisition or licensing candidates, to negotiate
appropriate terms of any such transaction or to successfully manage the integration of any acquisition.
As part of our business strategy, we intend
to continue pursuing strategic acquisitions and in-licensing opportunities with third parties for our existing products and to
complement our existing product pipeline. We have limited experience in completing acquisitions with third parties as well as performing
under in-licensing agreements and we may not be able to identify appropriate acquisition or licensing candidates or to successfully
negotiate the terms of any such transaction. The licensing and acquisition of pharmaceutical and biological products is a competitive
area. A number of more established companies are also pursuing strategies to license or acquire products in the pharmaceutical
field, and they may have a competitive advantage over us due to their size, cash resources and greater clinical development and
commercialization capabilities. If we are unable to successfully complete acquisitions or in-licensing transactions for suitable
products and product candidates, our prospects for growth could suffer.
Even if we are successful in completing one
or more acquisitions, the failure to adequately address the financial, operational or legal risks of these transactions could harm
our business. To finance an acquisition, we could be required to use our cash resources, issue potentially dilutive equity securities
or incur or assume debt or contingent liabilities. Accounting for acquisitions can require impairment losses or restructuring charges,
large write-offs of in-process research and development expense and ongoing amortization expenses related to other intangible assets.
In addition, integrating acquisitions can be difficult, and could disrupt our business and divert management resources. If we are
unable to manage the integration of any acquisitions successfully, our ability to develop new products and continue to expand our
product pipeline may be impaired.
Risks Related to Our Commercial Operations
We have a relatively short history of profitability. We may
not maintain operating profitability in the future, and this could force us to delay, reduce or abandon our commercialization efforts
or product development programs.
We have recorded net income since 2012. However,
we expect to continue to incur significant and increasing expenses for at least the next several years as we continue our research
activities, conduct development of our product candidates, seek and develop new products and compounds, seek regulatory approvals
for additional indications and additional territories for AMITIZA and for other drug candidates, and protect the patents of our
products from generic challenges. Regulatory changes and changes in market conditions, including the generic competition, may require
us to incur more expenses or change the timing of expenses such that we may incur unexpected losses. We may not be able to sustain
or increase profitability on a quarterly or annual basis. If we are unable to maintain profitability, the market value of our class
A common stock may decline.
We may need substantial additional funding and be unable to
raise capital when needed, which could force us to delay, reduce or abandon our commercialization efforts or product development
programs.
We expect our research and development expenses
and selling, general and administrative expenses to increase in connection with our ongoing activities. We may need substantial
additional funding and be unable to raise capital when needed or on attractive terms, which would force us to delay, reduce or
abandon our development programs.
We have continued to finance much of our operations
by payments received under our collaboration agreements with Takeda and Mylan. We believe that our existing cash and cash equivalents
and internally generated funds that we anticipate from AMITIZA royalty revenues and product sales will be sufficient to enable
us to fund our current operating expenses but not for all of our future research and development programs. Our future funding requirements,
however, will depend on many factors, including:
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actual levels of product royalty and product sales from AMITIZA;
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the cost of commercialization activities, including product marketing, sales and distribution;
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the scope and results of our research, preclinical and clinical development activities;
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the timing of, and the costs involved in, obtaining regulatory approvals;
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the costs involved in obtaining and maintaining proprietary protection for our products, technology and know-how, including litigation costs and the results of such litigation;
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our ability to recruit and retain internal qualified human resources to conduct these activities;
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the extent to which we acquire or invest in businesses, products and technologies;
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the success of our collaboration with Takeda and Mylan;
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the success of the commercialization efforts of AMITIZA; and
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our ability to establish and maintain additional collaborations.
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If we are required to raise additional funds
from external sources, we might accomplish this through at-the-market sales, public or private equity offerings, debt financings
or corporate collaboration and licensing arrangements. If we raise additional funds by at-the-market sales or issuing equity securities,
current stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting
or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring
dividends. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary
to relinquish valuable rights and related intellectual property to our technologies, research programs, products or product candidates.
In connection with the acquisition of R-Tech
in October 2015, we entered into the Credit Facility and, under such facility, issued secured promissory notes in the aggregate
amount of approximately $250.0 million to various lenders (the Term Notes). As of December 27, 2016 we repaid the entire outstanding
balance of the Term Notes through a private offering of the Convertible Notes described below.
On December 27, 2016, we issued $300.0 million
aggregate principal amount of our 3.25% Convertible Senior Notes due 2021 (the Convertible Notes) to Leerink Partners LLC, who
subsequently resold the Convertible Notes to qualified institutional buyers in reliance on the exemption from registration provided
by Rule 144A under the Securities Act of 1933, as amended. Regarding the Convertible Notes, if we do not generate sufficient cash
flows from our operations, we may not be able to pay the obligations of the Convertible Notes upon their maturity date in December
2021, which may adversely affect our operating results. Our failure to comply with the covenants and/or obligations related to
the Convertible Notes could result in an event of default or a fundamental change (as defined in the indenture relating to the
Convertible Notes), which could result in an immediate acceleration of the of the maturity of the Convertible Notes or immediate
repurchase for cash all or any portion of the Convertible Notes at a fundamental change repurchase price equal to 100% of the principal
amount of the notes to be repurchased, plus accrued and unpaid interest. These outcomes would materially and adversely affect our
operating results and our financial condition. As of December 31, 2016, we were compliant with our covenants and conditions under
the Convertible Notes.
We are developing internationally and licensing our products
globally; therefore, we have an increased exposure to foreign political conditions and regulatory requirements and fluctuations
in foreign currency exchange rates.
We expect that we will continue to seek global
opportunities for our products and to develop candidates internationally in the future. Such opportunities and development will
inherently subject us to a number of risks and uncertainties, including:
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changes in international regulatory and compliance requirements that could restrict our ability to
develop, market and sell our products;
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political and economic instability;
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diminished protection of intellectual property in some countries outside of the U.S.;
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trade protection measures and import or export licensing requirements;
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difficulty in staffing and managing international operations;
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differing labor regulations and business practices;
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potentially negative consequences from changes in or interpretations of tax laws;
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changes in international medical reimbursement policies and programs;
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financial risks such as longer payment cycles, difficulty collecting accounts receivable and exposure
to fluctuations in foreign currency exchange rates; and
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regulatory and compliance risks that relate to maintaining accurate information and control over sales
and distributors’ and service providers’ activities that may fall within the purview of the FCPA or similar foreign
laws such as the U.K. Bribery Act.
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Any of these factors may, individually or as
a group, have a material adverse effect on our business and results of operations. These or other similar risks could adversely
affect our revenue and profitability. As we develop internationally, our exposure to these factors will increase.
Risks Related to Product Pipeline
If our preclinical studies do not produce successful results
or if our clinical trials do not demonstrate safety and efficacy in humans, our ability to develop and commercialize our pipeline
will be impaired, which may jeopardize our business.
Before obtaining regulatory approval for the
sale of our product candidates, we must conduct extensive preclinical tests and clinical trials to demonstrate the safety and efficacy
in humans of our product candidates. Preclinical and clinical testing is expensive, is difficult to design and implement, can take
many years to complete, is subject to varying regulatory requirements and is uncertain as to outcome. Success in preclinical testing
and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial
do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We
may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could
delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:
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regulators or institutional review boards may not authorize us to commence a clinical trial or conduct
a clinical trial at a prospective trial site;
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clinical research organizations we retain to conduct clinical trials may not perform according to
the terms of the contract, causing delays or negative results in the clinical trials;
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our preclinical tests or clinical trials may produce negative or inconclusive results, and as a result
we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects
altogether;
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design of or enrollment in our clinical trials may be slower than we currently anticipate, resulting
in significant delays, or participants may drop out of our clinical trials at rates that are higher than we had anticipated;
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we might have to suspend or terminate our clinical trials, or perform additional trials, if we discover
that the participating patients are being exposed to unacceptable health risks;
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regulators or institutional review boards may require that we hold, suspend or terminate clinical
research for various reasons, including noncompliance with regulatory requirements;
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the cost of our clinical trials may be greater than we currently anticipate;
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we might have difficulty obtaining sufficient quantities of the product candidate being tested to
complete our clinical trials;
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any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval
commitments that render the product not commercially viable;
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many of our competitors have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical testing, site selection, conducting clinical trials, obtaining regulatory approvals, and
marketing approved products than we do and smaller or early stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies;
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the effects of our product candidates may not be the desired or anticipated effects or may include
undesirable side effects, or the product candidates may have other unexpected characteristics; and
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if we are required to conduct additional clinical trials or other testing of our product candidates
beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing or if
the results of these trials or tests are not positive or are only modestly positive, we may be delayed in obtaining marketing approval
for our product candidates, not be able to obtain marketing approval, or obtain approval for indications that are not as broad
as those for which we apply.
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Our product development costs will also increase
if we experience delays in testing or approvals. We do not know whether our clinical trials will begin as planned, will need to
be restructured or will be completed on schedule, if at all. Significant clinical trial delays also could allow our competitors
to bring products to market before we do and impair our ability to commercialize our products or product candidates.
We may fail to select or capitalize on the most scientifically,
clinically, or commercially promising or profitable product candidates.
We continue to evaluate our business strategy
and, as a result, may modify our strategy in the future. In this regard, we may, from time to time, focus our product development
efforts on different product candidates or may delay or halt the development of various product candidates. As a result of changes
in our strategy, we may change or refocus our existing product development, commercialization and manufacturing activities. This
could require changes in our facilities and our personnel. Any product development changes that we implement may not be successful.
In particular, we may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable
product candidates. Our decisions to allocate our research and development, management and financial resources toward particular
product candidates or therapeutic areas may not lead to the development of viable commercial products and may divert resources
from better opportunities. Similarly, our decisions to delay or terminate product development programs may also prove to be incorrect
and could cause us to miss valuable opportunities.
We may perform additional clinical trials for other indications
or in support of applications for regulatory marketing approval in jurisdictions outside the U.S. for our products. These supplemental
trials could be costly and could result in findings inconsistent with or contrary to our historic U.S. clinical trials.
In the future, we may be required, or we may
elect, to conduct additional clinical trials of AMITIZA to improve the current label or address regulatory authorities concerns
about AMITIZA. In addition, if we seek marketing approval from regulatory authorities in jurisdictions outside the U.S., they may
require us to perform additional clinical trials that would be costly and difficult to know if there will be successful outcomes
and to submit data from supplemental clinical trials in addition to data from the clinical trials that supported our U.S. filings
with the FDA. Any requirements to conduct supplemental trials would add to the cost of developing our product candidates. Additional
or supplemental trials could also produce findings that are inconsistent with the trial results we have previously submitted to
the FDA, in which case we would be obligated to report those findings to the FDA. This could result in new restrictions on the
existing marketing approval for AMITIZA or could force us to stop selling AMITIZA. Inconsistent trial results could also lead to
delays in obtaining marketing approval in the U.S. for other indications for AMITIZA or for other product candidates and could
cause regulators to impose restrictive conditions on marketing approvals and could even make it impossible for us to obtain marketing
approval. Any of these results could materially impair our ability to generate revenues and to achieve or maintain profitability.
Our agreements with makers of generic AMITIZA products are
subject to government scrutiny in the U.S.
We have been involved in patent litigations
that have resulted in settlement agreements. We have filed our settlement and license agreements with Par and Dr. Reddy’s
Laboratories, Inc. (Dr. Reddy’s) and will file any future settlement agreements with the Federal Trade Commission (FTC) and
the Antitrust Division of the Department of Justice for review. The FTC has, in the past, brought actions against some brand and
generic companies that have entered into such agreements alleging violations of antitrust laws in connection therewith.
We may receive civil investigative demands
from the FTC that requires us to provide the FTC information and documents relating to various settlement and other agreements
with makers of generic AMITIZA products following patent infringement claims and litigation, and other efforts principally regarding
AMITIZA. If the FTC believes that these or other agreements or efforts violate antitrust laws, it could challenge us through an
administrative or judicial proceeding, which could result in the imposition of monetary and/or injunctive relief, including the
invalidation of agreements, any of which could have a material adverse effect on our results of operations and financial condition.
In addition, any such litigation could be protracted, requiring a substantial commitment of our management’s time and cash
expenditures over multiple years.
Risks Related to Manufacturing
Following our acquisition of R-Tech, we now manufacture and
supply the active ingredient for our product and product candidates. However, we have limited experience in the management of pharmaceutical
manufacturing operations and still rely on third parties for encapsulation, packaging and other manufacturing activities. If we
or our third party manufacturers are unable to manufacture AMITIZA or our other product candidates in sufficient quantities, at
acceptable quality levels and at acceptable cost and if we are unable to identify a suitable replacement manufacturer, our sales
of AMITIZA and our further clinical development and commercialization of other products could be delayed, prevented or impaired.
Although we now control the manufacture and
supply of AMITIZA and our other product candidates, following our acquisition of R-Tech, we have little experience in manufacturing
pharmaceutical products. In addition, we currently rely, and expect to continue to rely, on various third party suppliers to create
the finished, packaged forms of AMITIZA, unoprostone, and any future compounds that we may determine to develop or commercialize.
We do not currently have an alternative source of supply for AMITIZA. If we are not able to supply AMITIZA or these other compounds
on a timely basis, in sufficient quantities and at acceptable levels of quality and price, and if we are unable to identify an
alternate manufacturer to perform these functions on acceptable terms, sales of AMITIZA would be significantly impaired, and our
development programs could be seriously jeopardized.
The risks relating to the manufacture of our
products include:
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we rely solely on our personnel, and that of our third party vendors, for quality assurance and their
continued compliance with regulations relating to the manufacture of pharmaceuticals;
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our manufacturing capacity may not be sufficient to produce commercial quantities of our product,
or to keep up with subsequent increases in the quantities necessary to meet potentially growing demand;
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we may not have access to the capital necessary to expand our manufacturing facilities in response
to our needs;
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if our operations were to be interrupted, or were we to elect to contract with another manufacturer
to supply us, it would be difficult and time consuming for us to find an alternate supplier and the change would need to be submitted
to and approved by the FDA and/or foreign regulatory agencies;
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we rely on numerous sub-contractors to fulfill its manufacturing obligations, and any difficulty or
disruption at one of these sub-contractors could jeopardize our ability to produce AMITIZA or our other products;
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we may experience events, such as a fire or natural disaster, that force us to stop or curtail production
for an extended period; and
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we could encounter significant increases in labor, capital or other costs that would make it difficult
to produce our products cost-effectively.
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In addition, we currently use one supplier
for a key ingredient used in the manufacture of our commercial and clinical products. We could experience delays in production
should it become necessary to switch its source of supply for such ingredient to another supplier or to manufacture such ingredient
itself. We have subcontracted with a single contract manufacturer to encapsulate the bulk form AMITIZA we supply into soft gelatin
capsules and another manufacturer to package the final product for distribution in the U.S. If these subcontractors experience
difficulties or delays in performing these services for any reason, our ability to deliver adequate supplies of finished product
to physicians and patients will be impaired, which could cause us to lose revenues. In addition, any change in the party providing
encapsulation of AMITIZA would need to be approved by the FDA and/or foreign regulatory agencies, and any change in the party packaging
the product would need to be submitted to and reviewed by the FDA and/or foreign regulatory agencies, which could increase the
time required to replace these subcontractors should that become necessary.
Our current and anticipated future dependence
upon these third parties for the manufacture of our products and product candidates may adversely affect our future revenues, our
cost structure, our ability to expand globally and our ability to develop product candidates and commercialize any approved products
on a timely and competitive basis. In addition, if our ability to manufacture prostones for our clinical trials is impaired for
any reason, we likely would experience delays in advancing these trials while we seek to identify and qualify replacement suppliers.
We may be unable to obtain replacement supplies on a timely basis, on terms that are favorable to us, or at all.
We and the other third-party manufacturers of our products
and product candidates are subject to significant regulations governing manufacturing facilities and procedures.
We, our subcontractors and suppliers and any
other potential manufacturer of our products or product candidates may fail to comply with the FDA’s cGMP regulations or
other governmental regulations. These regulations govern manufacturing processes and procedures and the implementation and operation
of systems to control and assure the quality of products approved for sale. In addition, the FDA or other regulatory agencies outside
the U.S. may at any time audit or inspect a manufacturing facility to ensure compliance with cGMP or similar regulations. Our failure,
or the failure of our subcontractors and suppliers or any other third-party manufacturer we use, to comply with applicable manufacturing
regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory
authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation,
seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly
and adversely affect supplies of our products and product candidates. For example, in connection with an inspection by the FDA
of our manufacturing facilities in Sanda, Japan, in November 2016, the FDA issued a Form 483 letter indicating certain deficiencies
with respect to our compliance with current good manufacturing practices. We are remediating the deficiencies and do not expect
any adverse impact on our ability to continue manufacturing our products in that facility.
If it were to become necessary for us to activate
a second source of supply, we would compete with other companies for access to appropriate manufacturing facilities. Any such change
would need to be submitted to and approved by the FDA and/or foreign regulatory agencies before commercial activities of AMITIZA
or any other product could resume. Among manufacturers that operate under cGMP regulations, there are a limited number that would
be both capable of manufacturing for us and willing to do so.
Risks Related to Our Dependence on Third Parties
We depend significantly on our collaborations with Takeda,
Mylan, Gloria and Santen and may depend in the future on collaborations with other third parties, to develop and commercialize
our product candidates.
A key element of our business strategy is to
collaborate where appropriate with third parties, particularly leading pharmaceutical companies, to co-develop, commercialize and
market our products and product candidates. We are currently party to the North America Takeda Agreement for the co-development
and commercialization of AMITIZA for gastrointestinal indications in the U.S. and Canada, as well as to the Global License Agreement
for AMITIZA whereby Takeda is responsible for all development, commercialization and regulatory activities other than in Canada,
the U.S., Japan and the People’s Republic of China.
We are also party to the Japan Mylan Agreement
for the development and commercialization of AMITIZA in Japan and the China Gloria Agreement under which Harbin Gloria is responsible
for all development, commercialization and regulatory activities for AMITIZA in the People’s Republic of China.
We are a party to the Santen Agreement for
the distribution and commercialization of RESCULA in Japan.
The success of our collaboration arrangements
will depend heavily on the efforts and activities of Takeda, Mylan, Gloria and Santen. The risks that we face in connection with
these collaborations and that we anticipate being subject to in any future collaborations, include the following:
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our existing agreements are, and any future collaboration agreements that we may enter into are likely
to be, subject to termination under various circumstances;
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our present and future collaborators may develop and commercialize, either alone or with others, products
and services that are similar to or competitive with the products that are the subject of their collaboration with us;
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our present and future collaborators may underfund or not commit sufficient resources to the testing,
marketing, distribution or other development of our products or may use committed resources inefficiently;
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we may become involved in disputes with our collaborators regarding operations, strategies, intellectual
property or financial matters;
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our present and future collaborators may not properly maintain or defend our intellectual property
rights or may utilize our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our
proprietary information or expose us to potential liability; and
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our present and future collaborators may change the focus of their development and commercialization
efforts.
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The ability of our products and product candidates
to reach their potential could be limited if Takeda, Mylan, Gloria, Santen or any other future collaborators decrease or fail to
increase spending relating to such products, fail to dedicate sufficient resources to developing or promoting our products or change
their business focus.
We rely on third parties to conduct our clinical trials and
those third parties may not perform satisfactorily or may fail to meet established deadlines for the completion of these trials.
We generally do not have the independent ability
to conduct global clinical trials for our product candidates. We rely on third parties, such as contract research organizations
(CROs), clinical data management organizations, medical institutions, and clinical investigators, to perform this function. We
use multiple CROs to coordinate the efforts of our clinical investigators and to accumulate the results of our trials. Our reliance
on these third parties for clinical development activities reduces our control over these activities. Furthermore, these third
parties may also have relationships with other entities, some of which may be our competitors.
In addition, we are responsible for ensuring
that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial.
The FDA and foreign regulatory agencies require us to comply with standards, commonly referred to as cGCP, for conducting and recording
and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not
relieve us of these responsibilities and requirements.
If tax authorities disagree with our transfer pricing policies
or other tax positions, we could become subject to significant tax liabilities.
We are a member of an affiliated group of entities,
and have had and will continue to have significant commercial transactions with these entities. Furthermore, we operate a number
of foreign subsidiaries. We expect to operate through a consolidated organizational structure and we expect to enter into commercial
transactions with some of these entities or future subsidiaries on an ongoing basis. As a result of these transactions, we will
be subject to complex transfer pricing and other tax regulations in both the U.S. and the other countries in which we and our affiliates
operate. Transfer pricing regulations generally require that, for tax purposes, transactions between our subsidiaries and affiliates
and us be priced on a basis that would be comparable to an arm’s length transaction and that contemporaneous documentation
be maintained to support the related party agreements. To the extent that U.S. or any foreign tax authorities disagree with our
transfer pricing or other policies, we could become subject to significant tax liabilities and penalties related to prior, existing
and future related party agreements. As of December 31, 2016, we performed updated tax analyses wherein liabilities for uncertain
tax positions were recorded for certain state jurisdictions based on nexus related to the sourcing of revenues. Should the tax
authorities in one or more of these states have different interpretations than us, we may be subject to additional tax liabilities.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain proprietary protection
for the intellectual property relating to our technology and products, the value of our technology and products will be adversely
affected and our ability to derive revenue from our products would be adversely affected. In addition, generic companies may file
Abbreviated New Drug Applications (ANDA) with the FDA against our products, which would likely require us to initiate patent infringement
lawsuits against those generic companies.
Our success depends in part on our ability
to obtain and maintain proprietary protection for the technology and know-how upon which our products are based, to operate without
infringing on the proprietary rights of others and to prevent others from infringing on our proprietary rights. The patent positions
of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify
our proprietary position for our intellectual property will depend on our success, in obtaining effective claims and enforcing
those claims once granted. The scope of protection afforded by a set of patent claims is subject to inherent uncertainty unless
the patent has already been litigated and a court has ruled on the meaning of the claim language and other issues affecting how
broadly a patent claim can be enforced. In some cases, we licensed patent applications from R-Tech instead of issued patents, and
we do not know whether these patent applications will result in the issuance of any patents.
Our licensed patents have recently been challenged
in the U.S. for AMITIZA (lubiprostone) by Par and Dr. Reddy’s and for RESCULA (unoprostone isopropyl) by Par Pharmaceutical
and Apotex through the filing of ANDAs by those generic companies with the FDA. While these challenges have all been resolved,
the patents at issue in those suits, as well as other patents, may be challenged, invalidated or circumvented, which could limit
the term of patent protection for lubiprostone, unoprostone isopropyl or our other products, diminish our ability to stop competitors
from marketing related products, and materially adversely affect our business and results of operations.
In connection with the settlement of patent
litigation in the United States related to our AMITIZA 8 mcg and 24 mcg soft gelatin capsule products, we have partnered with Par
Pharmaceuticals, Inc., or Par, and Dr. Reddy’s Laboratories, Ltd., or Dr. Reddy’s. Under our agreement with Par, we
granted Par a non-exclusive license to market Par’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules
in the United States for the indications approved for AMITIZA beginning January 1, 2021, or earlier under certain circumstances.
Beginning on January 1, 2021, Par will split with us the gross profits of the licensed products sold during the term of the agreement,
which continues until each of our related patents has expired. Under our agreement with Dr. Reddy’s, we granted Dr. Reddy’s
a non-exclusive license to market Dr. Reddy’s generic version of lubiprostone 8 mcg and 24 mcg soft gelatin capsules in the
United States for the indications approved for AMITIZA. This license does not begin until more than six years from November 9,
2016, or earlier under certain circumstances. Dr. Reddy’s will pay to us a share of net profits of generic lubiprostone products
sold during the term of the agreement, which decreases over time and ends when all of our related patents have expired. In the
event that either Par or Dr. Reddy’s elect to launch an authorized generic form of lubiprostone, we have agreed to supply
such product under the terms of a manufacturing and supply agreement at a negotiated price.
We have certain patents on our products that
expire in the near future. We may not be able to use other existing patents or patent applications to successfully protect our
products from generic competition. In addition, changes in either patent laws or in interpretations of patent laws in the U.S.
and other countries may diminish the value of our patents and other intellectual property or narrow the scope of the protection
provided by these patents. Accordingly, we cannot determine the degree of future protection for our proprietary rights in the patents
and patent applications. Furthermore, because of the extensive time required for development, testing and regulatory review of
a potential product, it is possible that, before any of our product candidates can be commercialized, a related patent may expire
or may remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.
Patents may not afford us protection against
competitors with similar technology. Because patent applications in the U.S. and many foreign jurisdictions are typically not published
until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature
often lag behind actual discoveries, we cannot be certain whether a judicial court will uphold the validity of a patent.
If our patent position does not adequately protect our product
and product candidates, others could compete against us more directly, which would harm our business, possibly materially.
The patent rights relating to lubiprostone
consist of 16 issued U.S. patents, and various issued European and Japanese patents. Our patent rights also include various U.S.,
European and Japanese patent applications relating to dosing regimens, pharmaceutical formulations and other claims. The U.S. patents
relating to compositions of matter expire between 2020 and 2027. The other U.S. and foreign patents expire between 2020 and 2035.
Our commercial success with respect to lubiprostone
will depend significantly on our ability to protect our existing patent position with respect to lubiprostone as well as our ability
to obtain and maintain adequate protection of other intellectual property for our technologies, product candidates and any future
products in the U.S. and other countries.
The patent positions of biotechnology and pharmaceutical
companies, including our patent position, involve complex legal and factual questions, and, therefore, validity and enforceability
cannot be predicted with certainty.
The degree of future protection for our proprietary
rights is uncertain, and we cannot ensure that:
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we or our licensors were the first to make the inventions covered by each of our pending patent applications;
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we or our licensors were the first to file patent applications for these inventions;
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others will not independently develop similar or alternative technologies or duplicate any of our
technologies;
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any of our pending patent applications or those we have licensed will result in issued patents;
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any of our patents or those we have licensed will be valid or enforceable;
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any patents issued to us or our licensors and collaborators will provide a basis for any additional
commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;
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we will develop additional proprietary technologies or product candidates that are patentable; or
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the patents of others will not have an adverse effect on our business.
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We may infringe the intellectual property rights of others,
which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing
our product and any product candidates.
Our success will depend in part on our ability
to operate without infringing the proprietary rights of third parties. There could be issued patents of which we are not aware
that our products or product candidates infringe. There also could be patents that we believe we do not infringe, but that we may
ultimately be found to infringe.
The pharmaceutical industry is characterized
by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future
and allege that our products or product candidates or the use of our technologies infringes these patent claims or that we are
employing their proprietary technology without authorization. Likewise, third parties may challenge or infringe upon our existing
or future patents.
Proceedings involving our patents or patent
applications or those of others could result in adverse decisions regarding:
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the patentability of our inventions relating to our product or any product candidates; and
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the enforceability, validity or scope of protection offered by our patents relating to our product
or any product candidates.
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Even if we are successful in these proceedings,
we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have
a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a
license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time
consuming. We may not have sufficient resources to bring these actions to a successful conclusion.
In addition, if we do not obtain a license,
develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared
invalid, we may:
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incur substantial monetary damages;
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encounter significant delays in bringing our product candidates to market; and
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be precluded from manufacturing or selling our product candidates.
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In such event, our business could be adversely
affected, possibly materially.
Risks Related to Regulatory Approval and Oversight
If we are not able to obtain required regulatory approvals,
we will not be able to commercialize our product candidates and our ability to generate revenue will be materially impaired.
Our product candidates and the activities associated
with their development and commercialization, including testing, manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory
agencies in and outside the U.S. Failure to obtain regulatory approval or appropriate pricing for a product candidate will prevent
us from commercializing the product candidates.
As we increase our foreign license arrangements,
we or our partner are seeking and will continue to seek approval in different territories. Different regulatory agencies may reach
different decisions in assessing the approval and pricing of our product candidates. Securing regulatory approval requires the
submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities
and supporting information to the regulatory agencies for each therapeutic indication to establish the product candidate’s
safety and efficacy. Our future products may not be effective, may be only moderately effective or may prove to have undesirable
side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial
use.
The process of obtaining regulatory approvals
is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity
and novelty of the product candidates involved. Changes in the regulatory approval policy during the development period, changes
in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application,
may cause delays in the approval or rejection of an application. The FDA and foreign regulatory agencies have substantial discretion
in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and
require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical
and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately
obtain may be limited in scope or subject to restrictions or post-approval commitments that render the product not commercially
viable. If any regulatory approval that we obtain is delayed or is limited, we may decide not to commercialize the product candidate
after receiving the approval.
We may not be able to obtain orphan drug exclusivity for our
product candidates. If our competitors are able to obtain orphan drug exclusivity for a product that is competitive with one or
more of our product candidates and we cannot show that our product candidate is clinically superior, we may not be able to have
competing products approved by the applicable regulatory authority for a significant period of time.
Regulatory authorities in some jurisdictions,
including Europe and the U.S., may designate drugs that target relatively small patient populations as orphan drugs. Generally,
if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it
has such designation, the product is entitled to a period of marketing exclusivity. The exclusivity applies only to the indication
for which the drug has been designated and approved. The applicable exclusivity period is seven years in the U.S., but this period
may be interrupted if a sponsor of a competitive product that is otherwise the same drug for the same use can show that its drug
is clinically superior to our orphan drug candidate. The European exclusivity period is ten years, but may be reduced to six years
if a drug no longer meets the criteria for orphan drug designation, including where it is shown that the drug is sufficiently profitable
so that market exclusivity is no longer justified. Even if we obtain orphan drug exclusivity for specified indications, we may
not be able to maintain it if a competitor with a product that is otherwise the same drug can establish that its product is clinically
superior.
We must comply with federal, state and foreign laws, regulations,
and other rules relating to the health care business, and, if we are unable to fully comply with such laws, regulations and other
rules, we could face substantial penalties.
We are or will be directly or indirectly through
our collaborators, subject to extensive regulation by the federal government, the states and foreign countries in which we may
conduct our business. The laws that directly or indirectly affect our ability to operate our business include the following:
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the federal Medicare and Medicaid Anti-Kickback law, which prohibits persons from knowingly and willfully
soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral
of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid Programs;
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other Medicare laws, regulations, rules, manual provisions and policies that prescribe the requirements
for coverage and payment for services performed by our customers, including the amount of such payment;
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the federal False Claims Act, which imposes civil and criminal liability on individuals and entities
who submit, or cause to be submitted, false or fraudulent claims for payment to the government;
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the federal False Statements Act, which prohibits knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare
benefits, items or services;
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the Foreign Corrupt Practices Act, which prohibits certain payments made to foreign government officials;
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state and foreign law equivalents of the foregoing and state laws regarding pharmaceutical company
marketing compliance, reporting and disclosure obligations; and
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the Patient Protection and Affordable Care Act, which changes access to healthcare products and services;
creates new fees for the pharmaceutical and medical device industries; changes rebates and prices for health care products and
services; and requires additional reporting and disclosure.
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If our operations are found to be in violation
of any of the laws, regulations, rules or policies described above or any other law or governmental regulation to which we or our
collaborators are or will be subject, or if the interpretation of the foregoing changes, we may be subject to civil and criminal
penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations.
Similarly, we do not control our collaborators, including their compliance activities and if our collaborators are found non-compliant
with applicable laws, they may be subject to sanctions, which could also have a negative impact on us. Any penalties, damages,
fines, curtailment or restructuring of our operations would harm our ability to operate our business and our financial results.
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted
by the regulatory authorities or the courts, and their provisions may be open to a variety of interpretations. Any action against
us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses,
divert management resources from the operation of our business and damage our reputation.
We only have regulatory approval for commercial distribution
and reimbursement of lubiprostone and unoprostone isopropyl in a limited number of countries, and may not receive regulatory approval
in other countries.
We are currently permitted to market our approved
products in only a limited number of countries on a commercial basis. To obtain marketing approval in other countries, we must
establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing,
among other things, clinical trials, pricing, promotion and distribution of the product. Approval procedures vary among countries,
and can involve additional product testing and additional administrative review periods. For example, we and Takeda are currently
exploring the commercialization of AMITIZA in a number of countries. We may not be successful in obtaining such approval.
In addition, regulatory authorities in countries
outside the U.S. and E.U. are increasingly requiring risk management plans and post-marketing commitments which may be more onerous
than those required in the U.S. and E.U. The time required to obtain approval in other countries may differ from that required
to obtain FDA approval or marketing authorization from the E.U. In particular, in many countries outside the U.S., including most
E.U. countries and Canada, a product must receive pricing and reimbursement approval before it can be commercialized broadly. This
can result in substantial delays in such countries, and the price that is ultimately approved may be lower than the price for which
we expect to offer, or would be willing to offer, lubiprostone in such countries, and may impact pricing in other countries. Marketing
and pricing and reimbursement approval in one country does not ensure such approvals in another. Failure to obtain the approvals
necessary to commercialize lubiprostone in other countries at reimbursement levels that are acceptable to us or any delay or setback
in obtaining such approvals would impair our partners’ ability to develop foreign markets for lubiprostone.
Risks Related to Our Class A Common Stock
Our largest stockholders and their affiliates maintain the
ability to have significant control over matters submitted to stockholders for approval, which could result in actions of which
you or other stockholders do not approve.
As of March 1, 2017, (i) our founder Dr. Ryuji
Ueno, through his direct or indirect interest in RJ Fund LLC and the Ryuji Ueno Foundation Inc., held 10,537,628 shares of class
A common stock, representing approximately 24.3% of our outstanding class A common stock, (ii) our founder Dr. Sachiko Kuno, through
her direct or indirect interest in SK Impact Fund LLC and the Sachiko Kuno Foundation Inc., held 10,537,627 shares of class A common
stock, representing approximately 24.3% of our outstanding class A common stock. Therefore, until such time that such stockholders
further dispose of additional shares of class A common stock, this concentration of ownership and voting power could influence
all matters requiring stockholder approval and have the effect of delaying or preventing a change in control of our company and
could prevent stockholders from receiving a premium over the market price if a change in control is proposed.
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 class A common stock may be lower as a result.
There are provisions in our certificate of
incorporation and by-laws that may make it difficult for a third party to acquire, or attempt to acquire, control of our company,
even if a change in control was considered favorable by our stockholders. For example, our Board of Directors has the authority
to issue up to 5,000,000 shares of preferred stock. The Board of Directors can fix the price, rights, preferences, privileges,
and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred
stock may delay or prevent a change in control transaction. As a result, the market price of our class A common stock and the voting
and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss
of voting control to other stockholders.
Our charter documents contain other provisions
that could have an anti-takeover effect, including:
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only one of our three classes of directors will be elected each year;
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stockholders are not entitled to remove directors other than by a 75.0% vote and for
cause;
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stockholders are not permitted to take actions by written consent;
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stockholders cannot call a special meeting of stockholders; and
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stockholders must give advance notice to nominate directors or submit proposals for
consideration at stockholder meetings.
In addition, we are subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. Furthermore, the indenture
governing our Convertible Notes requires us to repurchase the notes for cash, plus accrued and unpaid interest to, but excluding,
the fundamental change repurchase date, if we undergo certain fundamental changes. For example, an acquisition or a tender offer
representing more than 50% of the voting power of our class A common stock may trigger the requirement that we repurchase our Convertible
Notes, which could make it more costly for a potential acquirer to engage in a business transaction with us. These provisions could
discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our class A common stock. These provisions may also prevent changes
in our management.
The price of our class A common stock is volatile; investors
in our class A common stock could incur substantial losses.
The public trading market for our class A common
stock is characterized by a highly volatile stock price. The stock market in general and the market for pharmaceutical and biotechnology
companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular
companies. These broad market and industry factors might seriously harm the market price of our class A common stock, regardless
of our operating performance. As a result of this volatility, investors may not be able to sell their class A common stock at or
above the price they paid, and may have difficulty selling their shares at any price. The market price for our class A common stock
may be influenced by many factors, including:
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failure of AMITIZA (lubiprostone) or other approved products, if any, to achieve commercial success;
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results of clinical trials of our product candidates or those of our competitors;
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the regulatory status of our product candidates;
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the success of competitive products or technologies;
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regulatory developments in the U.S. and foreign countries;
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developments or disputes concerning patents or other proprietary rights;
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the ability of our third-party suppliers and manufacturers to perform;
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actual or anticipated fluctuations in our quarterly financial results;
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variations in the financial results of companies that are perceived to be similar to us;
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changes in the structure of healthcare payment systems and other regulatory developments;
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market conditions in the pharmaceutical and biotechnology sectors, including those relating to the
pricing of pharmaceutical products, and issuance of new or changed securities analysts’ reports or recommendations; and
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general economic, industry and market conditions.
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We will not be able to control many of these
factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future
performance. In addition, the market price of our class A common stock could also be affected by possible sales of our class A
common stock by holders of our Convertible Notes, who may view the Convertible Notes as a more attractive means of equity participation
in our company and by the holders possibly engaging in hedging or arbitrage trading activity involving our class A common stock
associated with the Convertible Notes.
We do not anticipate paying dividends on our capital stock.
We do not intend to pay dividends on our capital
stock in the foreseeable future. We currently intend to retain all cash we generate to fund the growth of our business. The declaration
of dividends is subject to the discretion of our board of directors and will depend on various factors, including our operating
results, financial condition, future prospects and any other factors deemed relevant by our board of directors. You should not
rely on an investment in our company if you require dividend income from your investment in our company. The success of your investment
will likely depend entirely upon any future appreciation of the market price of our capital stock, which is uncertain and unpredictable.
There is no guarantee that our capital stock will appreciate in value or even maintain the price at which you purchased your shares.
Substantial future sales of our class A common stock in the
public market, or the existence or conversion of our Convertible Notes, may depress our stock price and make it difficult for you
to recover the full value of your investment in our class A common stock.
As of March 1, 2017, we had 46,457,221 shares
of class A common stock outstanding. Substantially all of these shares are available for public sale, subject in some cases to
volume and other limitations or delivery of a prospectus. The market price of our class A common stock may decline if our class
A common stockholders sell a large number of shares of our class A common stock in the public market, or the market perceives that
such sales may occur. In addition, future issuances of our class A common stock upon the exercise or settlement of equity-based
awards and maturity of our Convertible Notes would dilute existing stockholders’ ownership interest in our company and any
sales in the public market of these class A common stock, could also adversely affect the market price of our class A common stock.
In addition, as of March 1, 2017, we had 4,695,478 outstanding options to purchase an aggregate of 4,695,478 shares of our class
A common stock. If these options are exercised and the shares issued upon exercise are sold, the market price of our securities
may also decline. These factors also could impair our ability to raise needed capital by depressing the price at which we could
sell our securities.
Pursuant to the indenture governing the Convertible
Notes, holders may convert their Convertible Notes into shares of Sucampo’ s Class A common stock at any time prior to December
14, 2021. Conversions of the Convertible Senior Notes dilute the ownership interests of existing shareholders to the extent that
we elect to deliver shares of our class A common stock (or a combination of cash and shares of our class A common stock) in connection
therewith. In addition, the existence of the Convertible Senior Notes may encourage short selling by market participants because
the conversion of the Convertible Notes could depress the price of our class A common stock.
Risks Related to Strategic Acquisitions
Our strategy of generating growth through acquisitions may
not be successful.
Our business strategy includes growing our
business through acquisition and in-licensing transactions. We may not be successful in identifying, effectively evaluating, acquiring
or in-licensing, and developing and commercializing additional products on favorable terms, or at all. Competition for attractive
product opportunities is intense and may require us to devote substantial resources, both managerial and financial, to an acquisition
opportunity. A number of more established companies are also pursuing strategies to acquire or in-license products. These companies
may have a competitive advantage over us due to their size, cash resources and greater development and commercialization capabilities.
Acquisition efforts can consume significant
management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote
significant resources to potential acquisitions that are never completed. Even if we are successful in acquiring a product or company,
it may not result in a successfully developed or commercialized product or, even if an acquired product is commercialized, competing
products or technologies could render a product noncompetitive, uneconomical or obsolete. Moreover, the cost of acquiring other
companies or in-licensing products could be substantial, and in order to acquire companies or new products, we may need to incur
substantial debt or issue dilutive securities. If we are unsuccessful in our efforts to acquire other companies or in-license and
develop additional products, or if we acquire or in-license unproductive assets, it could have a material adverse effect on the
growth of our business.
Our failure to successfully integrate acquired assets into
our operations could adversely affect our ability to grow our business.
We may not be able to integrate any acquired
business successfully or operate any acquired business profitably. In addition, cost synergies, if achieved at all, may be less
than we expect, or may take greater time to achieve than we anticipate.
Issues that could delay or prevent successful
integration or cost synergies of an acquired business include, among others:
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retaining existing customers and attracting new customers;
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retaining key employees;
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diversion of management attention and resources;
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conforming internal controls, policies and procedures, business cultures and compensation programs;
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consolidating corporate and administrative infrastructures;
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consolidating sales and marketing operations;
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identifying and eliminating redundant and underperforming operations and assets;
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assumption of known and unknown liabilities;
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coordinating geographically dispersed organizations; and
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managing tax costs or inefficiencies associated with integrating operations.
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If we are unable to successfully integrate
future acquisitions with our existing businesses, or operate any acquired business profitably, we may not obtain the advantages
that the acquisitions were intended to create, which may materially adversely affect the growth of our business.
We may be unable to realize the benefits we anticipate from strategic acquisitions,
or it may take longer than anticipated for us to achieve those benefits.
Our realization of the benefits anticipated
as a result of our future strategic acquisitions will depend in part on the integration of the acquired company’s business
with ours. However, there can be no assurance that we will be able to operate the target’s business profitably or integrate
it successfully into our operations in a timely fashion, or at all. Our future success as a combined company depends, in part,
upon our ability to manage this expanded business, which will pose substantial challenges for our management, including challenges
related to the management and monitoring of new operations and associated increased costs and complexity. The dedication of management
resources to this integration could detract attention from our current day-to-day business, and we cannot assure stockholders that
there will not be substantial costs associated with the transition process or other negative consequences as a result of these
integration efforts. These effects, including incurring unexpected costs or delays in connection with integration of the two businesses,
or the failure of the combined company to perform as expected, could negatively affect our stock price or could harm our financial
condition, results of operations or business prospects.
The loss of key personnel could hurt our business and our prospects.
The success of our strategic acquisitions will
depend, in part, on our ability to retain key employees who continue employment with the combined company after each such acquisition
is completed. If any of these key employees terminate their employment, our manufacturing, supply or development activities might
be negatively affected and our management’s attention might be diverted from successfully integrating the acquired company’s
operations. In addition, we might not be able to locate suitable replacements on reasonable terms for any such key employees who
leave the combined company.
Financial Related Risks
If we fail to comply with the covenants and other obligations
under our Convertible Notes, holders may be able to accelerate amounts owed under the Convertible Notes or require repurchase of
all Convertible Notes.
On December 27, 2016, we issued the Convertible
Notes consisting of an approximately $300.0 million aggregate principal amount with interest of 3.25% in a private placement to
qualified institutional buyers. The Convertible Notes are senior unsecured obligations, and interest of 3.25% per year payable
semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2017. The notes will mature on December
15, 2021, unless earlier repurchased or converted in accordance with their terms. The Convertible Notes are not redeemable prior
to the maturity date, and no sinking fund is provided for the Convertible Notes.
The Convertible Notes are convertible at an
initial conversion rate of 60.2637 shares of class A common stock per $1,000 principal amount of the Convertible Notes, subject
to adjustment under the indenture, which is equal to an initial conversion price of approximately $16.59 per share of class A common
stock. Upon conversion, the Convertible Notes will be settled in shares of our class A common stock, together with a cash payment
in lieu of delivering any fractional share. The conversion rate will be subject to adjustment in some events but will not be adjusted
for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we
will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate
event in certain circumstances.
If we undergo a fundamental change, holders
may require us to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal
to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding,
the fundamental change repurchase date.
The indenture includes customary terms and
covenants, including certain events of default after which the Convertible Notes may be due and payable immediately. If the maturity
date of the Convertible Notes were to be accelerated, we may not have sufficient funds to repay the related indebtedness, which
could have a material adverse effect on our financial condition and our business.
Our current indebtedness and any additional debt financing
may restrict the operation of our business and limit the cash available for investment in our business operations.
In addition to our current debt, we may seek
additional debt financing to support our ongoing activities or to provide additional financial flexibility. Debt financing could
have significant adverse consequences for our business, including:
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requiring us to dedicate a substantial portion of any cash flow from operations to payment on our
debt, which would reduce the amounts available to fund other corporate initiatives;
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increasing the amount of interest that we have to pay on debt with variable interest rates, if market
rates of interest increase;
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subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions,
acquire companies, products or technology, or obtain further debt financing;
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requiring us to pledge our assets as collateral, which could limit our ability to obtain additional
debt financing;
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limiting our flexibility in planning for, or reacting to, general adverse economic and industry conditions;
and
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placing us at a competitive disadvantage compared to our competitors that have less debt, better debt
servicing options or stronger debt servicing capacity.
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We may not have sufficient funds or be able
to obtain additional financing to pay the amounts due under the Convertible Notes or our indebtedness. An event of default could
result in the acceleration of amounts due under a particular debt instrument and a cross default and acceleration under other debt
instruments, and we may not have sufficient funds or be able to obtain additional financing to make any accelerated payments.
We may require significant additional funding and may be unable
to raise capital when
needed or on acceptable terms, which would harm our ability to grow our business, results
of operations and financial condition.
We may require significant additional funding
to grow our business, including to acquire other companies or products, in-license and develop additional products, enhance our
manufacturing capacity, support commercial marketing activities or otherwise provide additional financial flexibility. We may also
require additional funding to support our ongoing operations in the event that our ability to sell AMITIZA to Takeda, Mylan and
Gloria or sell RESCULA to Santen is interrupted for an extended period of time, reducing our revenues and decreasing our cash balances.
As of December 31, 2016, we had
$267.6 million of cash, cash equivalents, accounts receivable and product royalties receivable. Our future capital requirements
will depend on many factors, including, among others:
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the level, timing and cost of product sales;
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the extent to which we acquire or invest in companies, products or technologies;
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the payment obligations under our indebtedness;
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the scope, progress, results and costs of our development activities;
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our ability to obtain funding from collaborative partners, government entities and non-governmental
organizations for our development programs; and
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the costs of commercialization activities, including product marketing, sales and distribution.
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If our capital resources are insufficient to
meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings,
bank loans or collaboration and licensing arrangements. If we raise funds by issuing equity securities, our stockholders may experience
dilution. Public or bank debt financing, if available, may involve agreements that include covenants, limiting or restricting our
ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities
or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, it may be necessary
to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to
us.
Current economic conditions may make it difficult
to obtain financing on attractive terms, or at all. If financing is unavailable or lost, our business, results of operations and
financial condition would be adversely affected and we could be forced to delay, reduce the scope of or eliminate many of our planned
activities.
Our effective tax rate may fluctuate and we may incur obligations
in tax jurisdictions in excess of accrued amounts.
As a global biopharmaceutical company, we are
subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is derived from
a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate
the amount of tax that will become payable in each of such places. Our effective tax rate, however, may be different than experienced
in the past due to numerous factors, including changes in the mix of our profitability from country to country, currency fluctuations,
the results of examinations and audits of our tax filings, adjustments to the value of our uncertain tax positions, changes in
accounting for income taxes, and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly
different from previous periods or our current expectations. In addition, our inability to secure or sustain acceptable arrangements
with tax authorities and future changes in the tax laws, among other things, may result in tax obligations in excess of amounts
accrued in our financial statements.
In the U.S., there are several proposals under
consideration to reform tax law, including proposals that may reduce or eliminate the deferral of U.S. income tax on our unrepatriated
earnings, penalize certain transfer pricing structures, and reduce or eliminate certain foreign or domestic tax credits or deductions.
Our future reported financial results may be adversely affected by tax law changes which restrict or eliminate certain foreign
tax credits or our ability to deduct expenses attributable to foreign earnings, or otherwise affect the treatment of our unrepatriated
earnings.
In addition to U.S. tax reform proposals, the
adoption of some or all of the recommendations set forth in the Organization for Economic Co-operation and Development’s
project on “Base Erosion and Profit Shifting” (BEPS) by tax authorities in the countries in which we operate, could
negatively impact our effective tax rate. These recommendations focus on payments from affiliates in high tax jurisdictions to
affiliates in lower tax jurisdictions and the activities that give rise to a taxable presence in a country.