Item 1A. Risk Factors
The following risk factors
and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties
described below and in our other filings are not the only ones we face. Additional risks and uncertainties not presently known
to us or that we presently deem less significant may also impair our business operations. Please see the “Forward-Looking
Statements” section of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that
are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations
and future growth prospects could be materially and adversely affected.
Risks Related to Our Financial Position and
Need for Additional Capital
We are dependent on the successful commercialization
of Ocaliva® (obeticholic acid or OCA), for primary biliary cholangitis, or PBC. To the extent Ocaliva is not commercially successful,
our business, financial condition and results of operations may be materially adversely affected and the price of our common stock
may decline
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Ocaliva is our only drug that has been approved
for sale and it has only been approved for the treatment of PBC in combination with ursodiol in adults with an inadequate response
to ursodiol or as monotherapy in adults unable to tolerate ursodiol.
Our ability to generate profits from operations
and become profitable will depend on the success of commercial sales of Ocaliva. However, the successful commercialization of Ocaliva
in PBC is subject to many risks. We are currently undertaking our first commercial launch with Ocaliva in PBC, and there is no
guarantee that we will be able to do so successfully. There are numerous examples of unsuccessful product launches and failures
to meet expectations of market potential, including by pharmaceutical companies with more experience and resources than us.
The commercial success
of Ocaliva depends on the extent to which patients, physicians and payers accept and adopt Ocaliva as a treatment for PBC, and
we do not know whether our or others’ estimates in this regard will be accurate. While we continue to conduct various activities,
such as profiling of our customers, to better understand how physicians care for PBC patients, PBC is an orphan disease in which
Ocaliva represented the first new therapy in approximately 20 years. As such, there is significant uncertainty in the degree of
market acceptance Ocaliva will have in PBC. For example, if the patient population suffering from PBC is smaller than we estimate,
or even if the patient population matches our estimate but Ocaliva is not widely accepted as a treatment for PBC, the commercial
potential of Ocaliva will be limited. Physicians may not prescribe Ocaliva and patients may be unwilling to use Ocaliva if coverage
is not provided or reimbursement is inadequate to cover a significant portion of the cost. Additionally, the use of Ocaliva in
a non-trial setting may result in the occurrence of unexpected or a greater incidence of side effects, adverse reactions or misuse
that may negatively affect the commercial prospects of Ocaliva. Furthermore, any negative development in any other development
program of OCA or our failure to satisfy the post-marketing regulatory commitments and requirements to which we are or may become
subject, including the completion of our Phase 4 COBALT trial, may adversely impact the commercial results and potential of Ocaliva.
As a result, we cannot
foresee if Ocaliva will ever be accepted as a therapy in PBC that eventually results in revenues that can sustain operations. It
may take the passage of a significant amount of time to generate sufficient revenues to sustain operations even if Ocaliva becomes
accepted as a therapy in PBC. Furthermore, because Ocaliva is still undergoing regulatory review in a number of jurisdictions outside
of the United States and the European Union, we may not be able to commercialize Ocaliva in PBC in such other jurisdictions, which
may also limit our prospects. If the commercialization of Ocaliva for PBC is unsuccessful or perceived to be disappointing, the
long-term prospects of Ocaliva and our company may be significantly harmed.
We have never been profitable. We expect to incur losses
for the foreseeable future, and we may never achieve or sustain profitability.
We have never been profitable
and do not expect to be profitable in the foreseeable future. We have incurred net losses of $412.8 million, $226.4 million and
$283.2 million for the years ended December 31, 2016, 2015 and 2014, respectively, and $249.1 million and $292.8 million for the
nine months ended September 30, 2017 and 2016, respectively. To date, we have financed our operations primarily through public
and private securities offerings and payments received under our licensing and collaboration agreements. At September 30, 2017,
we had $492.7 million in cash, cash equivalents and investment securities.
We have devoted substantially
all of our resources to our development efforts relating to our product candidates, including conducting clinical trials of our
product candidates, providing general and administrative support for these operations, protecting our intellectual property and
engaging in activities to prepare for and commercially launch Ocaliva in PBC.
We expect to continue
to incur losses for the foreseeable future, and we expect these losses to increase as we continue to commercialize Ocaliva for
PBC in jurisdictions where marketing approval has been received, seek regulatory approval for and prepare to commercially launch
Ocaliva for PBC in jurisdictions without marketing approval, develop and seek regulatory approvals for OCA in nonalcoholic steatohepatitis,
or NASH, and other indications, and add infrastructure and personnel in the United States and internationally to support our product
development and commercialization efforts and operations as a public company. We believe our prospects and ability to significantly
grow revenues will be dependent on our ability to successfully develop and commercialize OCA for indications other than PBC such
as NASH and primary sclerosing cholangitis, or PSC. As a result, we expect a significant amount of resources to continue to be
devoted to our development programs for OCA.
As part of our product
development activities, we anticipate that we will continue our Phase 4 COBALT trial of OCA in PBC, continue our Phase 3 clinical
program of OCA in NASH, including the Phase 3 REGENERATE trial in non-cirrhotic NASH patients with liver fibrosis, and continue
the development of OCA in PSC. We also expect to continue the development of OCA in additional diseases, such as biliary atresia,
a rare pediatric disease characterized by deficient bile duct development for which we initiated a Phase 2 trial in OCA called
CARE. Our overall development program for OCA in NASH is expected to include a number of trials, such as the Phase 2 clinical trial,
referred to as the CONTROL trial, to assess the lipid metabolic effects of OCA and the effects of concomitant statin administration
in NASH patients for which topline results were reported in July 2017. Furthermore, we completed a Phase 1 clinical trial for INT-767,
an earlier stage product candidate. Our expenses could increase if we are required by the U.S. Food and Drug Administration, or
FDA, or the European Medicines Agency, or EMA, to perform studies or trials in addition to those currently expected, or if there
are any delays in completing our clinical trials or the development of any of our product candidates.
If OCA or any of our other
product candidates fails in clinical trials or does not gain regulatory approval, or if they do not achieve market acceptance,
we may never become profitable. Our net losses and negative cash flows have had, and will continue to have, an adverse effect on
our stockholders’ equity and working capital. Because of the numerous risks and uncertainties associated with pharmaceutical
product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when,
or if, we will be able to achieve profitability. The amount of future net losses will depend, in part, on the rate of future growth
of our expenses and our ability to generate revenues.
We will require substantial additional
funding, which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit,
reduce or cease our operations.
We are currently advancing
OCA through clinical development for multiple indications and other product candidates through various stages of clinical and preclinical
development. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive.
In addition, subject to
obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product
sales, marketing, manufacturing and distribution. We have incurred and anticipate incurring significant expenses as we continue
to commercialize Ocaliva in PBC. As part of our longer-term strategy, we also anticipate incurring expenses in connection with
increases in our product development, scientific, commercial and administrative personnel and expansion of our facilities and infrastructure
in the United States and abroad. We expect to incur additional costs associated with operating as a public company and further
plan on expanding our operations in the United States, Europe and in certain other countries. We may also engage in activities
that involve potential in- or out-licensing of products or technologies or acquisitions of other products, technologies or businesses.
As of September 30, 2017,
we had $492.7 million in cash, cash equivalents and investment securities. We currently project adjusted operating expenses will
fall in the middle of our previously guided range of $380 million to $420 million in the fiscal year ending December 31, 2017,
which excludes stock-based compensation and other non-cash items. These expenses are planned to support the continued commercialization
of Ocaliva in PBC in the United States and other markets, and continued clinical development for OCA in PBC and NASH and our other
earlier stage pipeline programs. We may make additional investments over 2017 as our business evolves. Accordingly, we will continue
to require substantial additional capital in connection with our continuing operations, including continuing our clinical development
and commercialization activities, despite having started to generate revenues from product sales. Because successful development
and commercialization of our products and product candidates is uncertain, we are unable to estimate the actual funds required
to complete the research and development and commercialization of our products and product candidates.
Adjusted operating expense
is a financial measure not calculated in accordance with U.S. generally accepted accounting principles, or GAAP. We anticipate
that stock-based compensation expense will represent the most significant non-cash item that is excluded in adjusted operating
expenses as compared to operating expenses under GAAP. See “Non-GAAP Financial Measures” for more information.
Due to the many variables
inherent to the development and commercialization of novel therapies, such as the risks described in this “Risk Factors”
section of this quarterly report on Form 10-Q, and our rapid growth and expansion, we currently cannot accurately or precisely
predict the duration beyond mid-2018 over which we expect our cash and cash equivalents to be sufficient to fund our operating
expenses and capital expenditure requirements. However, we currently believe that our cash and cash equivalents will be sufficient
for us to:
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continue the initial commercialization of Ocaliva for PBC in the United States, the European Union
and other jurisdictions where it has received marketing approval;
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prepare for and initiate the commercial launch of Ocaliva in PBC in certain other target markets
across the world, but not commercially launch Ocaliva in PBC in other non-target countries across the world;
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continue and expand our clinical development programs for OCA in PBC and NASH, such as continuing,
but not completing, our planned Phase 3 clinical program for OCA in NASH, including the REGENERATE trial, and our ongoing COBALT
confirmatory clinical outcomes trial of OCA in PBC; and
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conduct further assessments of OCA for use in PSC and potentially initiate, but not complete, additional
clinical trials for OCA in PSC.
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Accordingly, we will continue to require substantial
additional capital in connection with our continuing operations, including continuing our commercialization plans and our research
and development activities and building our global infrastructure to support these activities.
The amount and timing
of our future funding requirements will depend on many factors, including:
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the rate of progress and cost of our continued commercialization activities for Ocaliva in PBC
in jurisdictions where it has received marketing approval;
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our ability to receive marketing approval of Ocaliva for PBC in countries where it has not received
marketing approval based on our regulatory submissions package and our work completed to date, including the willingness of the
relevant regulatory authorities to accept the POISE trial, which is our completed Phase 3 clinical trial for PBC;
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the degree of effort and time needed to prepare for and initiate the commercial launches of Ocaliva
in PBC in the jurisdictions where it receives marketing approval;
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the progress, costs, results of and timing of our clinical development programs for OCA in PBC,
NASH, PSC and other indications, such as the COBALT trial, the REGENERATE trial, the upcoming Phase 3 trial in NASH patients with
cirrhosis or other trials we may conduct;
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the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals;
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the expansion of our research and development activities and the product candidates that we pursue,
including our product candidates in preclinical development such as INT-777;
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the expansion of our operations, personnel and the size of our company and our need to continue
to expand in the longer term;
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the costs associated with securing and establishing manufacturing capabilities and procuring the
materials necessary for our products and product candidates;
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market acceptance of our products and product candidates, which may be affected by reimbursement
from payors;
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the costs of acquiring, licensing or investing in businesses, products, product candidates and
technologies;
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our ability to maintain, expand and defend the scope of our intellectual property portfolio, including
the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing,
prosecution, defense and enforcement of any patents or other intellectual property rights;
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the effect of competing technological and market developments; and
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other cash needs that may arise as we continue to operate our business.
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We have no committed external sources of funding.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail our planned activities, including
research and development programs and commercialization activities.
Raising additional capital may
cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever,
as we can generate substantial product revenues, we expect to seek additional funding through a combination of equity offerings,
debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic
alliances and licensing arrangements. Additional funding may not be available to us on acceptable terms or at all.
The terms of any financing
may adversely affect the holdings or the rights of our security holders. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of
these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. 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. We also could be required to seek funds
through arrangements with collaborative partners or otherwise that may require us to relinquish rights to some of our technologies
or product candidates or otherwise agree to terms unfavorable to us. If we are unable to raise additional funds through equity
or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization
efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
We have a limited operating history
as a commercial organization, which may make it difficult to predict our future performance, and we expect to continue to face
a number of factors that may cause operating results to fluctuate.
We are a biopharmaceutical
company with a limited operating history as a commercial entity. Prior to the commercial launch of Ocaliva for PBC in the United
States in June 2016 and certain European countries in 2017, our operations were limited to developing our technology and undertaking
preclinical studies and clinical trials of our product candidates and engaging in pre-commercial activities for Ocaliva in PBC.
We do not have approval for any of our other product candidates.
While we commercially
launched Ocaliva for PBC in the United States, Europe and certain other jurisdictions, we will need to conduct further activities
to develop and cultivate a sustainable market for our drug in this orphan disease. These efforts will continue to be expensive
and time-consuming, and we cannot be certain that we will be able to successfully develop a market. For example, we will need to
conduct significant sales and marketing activities in jurisdictions where Ocaliva receives marketing approval. In the event we
are unable to effectively develop and maintain a market for Ocaliva in PBC, our ability to effectively commercialize Ocaliva would
be limited, and we would not be able to generate product revenues successfully.
Furthermore, our financial
condition and operating results have varied significantly in the past and are expected to continue to significantly fluctuate from
quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business
that may contribute to these fluctuations include:
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any delays in regulatory review and approval of our product candidates in clinical development;
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delays in the commencement, enrollment and timing of clinical trials;
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difficulties in identifying and treating patients suffering from our target indications, including
those due to PBC and PSC being rare diseases and NASH currently requiring an invasive liver biopsy for diagnosis;
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the success of our clinical trials through all phases of clinical development, such as the success
of our Phase 3 REGENERATE trial of OCA in non-cirrhotic NASH patients with liver fibrosis;
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potential side effects of Ocaliva and our other product candidates that could delay or prevent
approval or cause an approved drug to be taken off the market;
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the required timeframe for us to receive and analyze data from our clinical trials;
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our ability to identify and develop additional product candidates;
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market acceptance of Ocaliva and our product candidates, which may be affected by the reimbursement
that our products receive from payors;
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our ability to establish and maintain an effective sales and marketing infrastructure directly
or through collaborations with third parties;
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competition from existing products or new products that may emerge;
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the ability of patients or healthcare providers to obtain coverage or reimbursement for our products
and the extent to which such coverage or reimbursement will be provided;
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our ability to adhere to clinical trial requirements directly or with third parties such as contract
research organizations, or CROs;
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our dependency on third-party manufacturers to manufacture our products and key ingredients;
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our ability to establish or maintain collaborations, licensing or other arrangements;
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the costs to us, and our ability and our third-party collaborators’ ability to obtain, maintain
and protect our intellectual property rights;
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costs related to and outcomes of potential intellectual property, securities and other litigation;
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our ability to adequately support future growth;
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our ability to attract and retain key personnel to manage our business effectively;
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our ability to build and improve our company’s infrastructure, systems and controls;
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potential product liability claims; and
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our ability to obtain and maintain adequate insurance coverage.
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Risks Related to the Development
and the Regulatory Review and
Approval of Our Products and Product Candidates
We cannot be certain if Ocaliva will receive
full approval for PBC in jurisdictions where it has received accelerated or conditional approval, or that Ocaliva will be approved
for PBC in other jurisdictions. Furthermore, OCA may fail to become approved for any other indication and we may not be able to
successfully receive regulatory approval for any other product candidate. Without regulatory approval, we will not be able to market
and commercialize our product candidates.
The development of a product
candidate and issues relating to its approval and marketing are subject to extensive regulation by the FDA in the United States,
the EMA in Europe and regulatory authorities in other countries, with regulations differing from country to country. We are not
permitted to market our product candidates in the United States or Europe until we receive approval of a New Drug Application,
or NDA, from the FDA or a Marketing Authorization Application, or MAA, from the EMA, respectively. Currently, our ability to generate
revenue related to product sales will depend on the successful marketing of Ocaliva for PBC and the development and regulatory
approval of OCA for the treatment NASH and our other product candidates.
Ocaliva is our only drug
that has been approved for sale. In the United States, Ocaliva has been approved for PBC under the accelerated approval pathway.
Accelerated approval was granted for OCA in PBC based on a reduction in alkaline phosphatase; however, an improvement in survival
or disease-related symptoms has not been established. Continued approval of Ocaliva for this indication may be contingent upon
verification and description of clinical benefit in confirmatory trials. Our Phase 4 COBALT confirmatory outcomes trial may fail
to show a clinical benefit for OCA in PBC or may not satisfy the requirements of the regulatory authorities for other reasons.
As part of the post-marketing
requirements, our COBALT trial includes a cross-section of PBC patients with early, moderately advanced and advanced disease according
to the so-called Rotterdam criteria. We have agreed to evaluate the safety and efficacy of Ocaliva in patients with moderate to
severe hepatic impairment and as monotherapy in patients with PBC. Finally, we have also agreed to develop and characterize a lower
dose formulation of Ocaliva to allow for once daily dosing in patients with moderate or advanced hepatic impairment.
We commenced our commercial
launch of Ocaliva for PBC in certain European countries in 2017 after the European Commission granted conditional approval for
Ocaliva for the treatment of PBC. The marketing authorization in the European Union is conditioned on the completion of the COBALT
trial and a trial evaluating the safety and efficacy of Ocaliva in patients with moderate to severe hepatic impairment.
In May 2017, we received
a marketing authorization with conditions for Ocaliva in PBC in Canada. We also plan to apply for marketing approval of Ocaliva
for PBC in certain other markets across the world.
We currently have no other
products approved for sale and we cannot guarantee that we will ever have additional marketable products or that our products will
be approved for use in additional indications. NDAs and MAAs must include extensive preclinical and clinical data and supporting
information to establish the product candidate’s safety and effectiveness for each desired indication. NDAs and MAAs must
also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of
an NDA or an MAA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval. The FDA and
the EMA review processes can take years to complete and approval is never guaranteed. Even after the submission of an NDA to the
FDA, the FDA must decide whether to accept or reject the submission for filing. In addition, in June 2016, eligible members of
the electorate in the United Kingdom decided by referendum to leave the European Union, or Brexit. Since a significant proportion
of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, the referendum could
materially change the regulatory regime applicable to our operations, including with respect to Ocaliva or our other product candidates.
Approvals may also be
conditional upon the completion of one or more clinical trials. In addition, delays in approvals or rejections of marketing applications
in the United States, Europe or other countries may be based upon many factors, including regulatory requests for additional analyses,
reports, data, preclinical studies and clinical trials, regulatory questions regarding different interpretations of data and results,
changes in regulatory policy during the period of product development and the emergence of new information regarding our product
candidates or other products. Regulatory approval is also dependent on successfully passing regulatory inspection of our company,
our clinical sites and key vendors and to ensure compliance with applicable good clinical, laboratory and manufacturing practices
regulation. Critical findings could jeopardize or delay the approval of the NDA or MAA.
We will also be required
to finalize the negotiations and discussions on our product labels for the respective jurisdictions in which we seek regulatory
approval. Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications or uses for which the
product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials,
risk mitigation programs or reporting as conditions of approval. Also, regulatory approval for any of our product candidates may
be withdrawn. Regulatory authorities in countries outside of the United States and Europe also have requirements for approval of
drug candidates with which we must comply prior to marketing in those countries. Obtaining regulatory approval for marketing of
a product candidate in one country does not ensure that we will be able to obtain regulatory approval in any other country.
We will need to complete
a number of clinical trials and other studies for the continued development of OCA in indications other than PBC. For example,
we currently have ongoing our Phase 3 REGENERATE trial of OCA in non-cirrhotic NASH patients with liver fibrosis. We also intend
to conduct additional trials in NASH, such as one in NASH patients with cirrhosis. In each of these cases, our ability to obtain
the approvals necessary to commercialize our product candidates will depend on our ability to conduct and complete these additional
trials as well as assemble various other data to complete our regulatory filings for OCA in the relevant indication or patient
population.
There can be no assurance
that we will be able to receive marketing approval for OCA in PBC in jurisdictions where it is not yet approved or marketing approval
for OCA in NASH or any other indication. We cannot predict whether our trials and studies as to NASH or any other indication or
patient population will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and
clinical trials we have conducted to date or require us to conduct additional studies or trials. For example, while OCA received
breakthrough therapy designation from the FDA in January 2015 for the treatment of NASH patients with liver fibrosis, we do not
know if one pivotal clinical trial will be sufficient for marketing approval or if regulators will ultimately agree to a surrogate
endpoint for accelerated approval of OCA for the treatment of NASH. While the interim analysis for the REGENERATE trial will be
based on a histological endpoint as was the case in the Phase 2b clinical trial for the treatment of NASH, known as the FLINT trial,
sponsored by the U.S. National Institute of Diabetes and Digestive and Kidney Diseases, or NIDDK, a part of the National Institutes
of Health, our Phase 3 REGENERATE trial has different trial designs. For example, upon the finalization of a protocol amendment
underway, the primary endpoint for the interim analysis for REGENERATE may be achieved based on one of: (i) the proportion of OCA-treated
patients relative to placebo achieving at least one stage of liver fibrosis improvement with no worsening of NASH or (ii) the proportion
of OCA-treated patients relative to placebo achieving NASH resolution with no worsening of liver fibrosis. Furthermore, we selected
a definition for NASH resolution for the trial, which defines a responder as a patient achieving a histologic score of 0 for ballooning
and 0 or 1 for inflammation. The REGENERATE trial will also remain blinded after the interim analysis and continue to follow patients
until the occurrence of a pre-specified number of adverse liver-related clinical events, including progression to cirrhosis, to
confirm clinical benefit on a post-marketing basis. While the statistical analysis planned for our REGENERATE trial is designed
based on the data from the FLINT trial, the differences in the two trials may limit the utility of using FLINT as a basis for the
design of the REGENERATE trial.
Furthermore, the Phase
2 dose ranging trial of OCA in 200 adult NASH patients in Japan conducted by our collaborator, Sumitomo Dainippon, did not meet
its primary endpoint with statistical significance. In this trial, there was a dose dependent, although not statistically significant,
increase in the percentage of OCA treated patients compared to placebo who achieved the primary endpoint (p=0.053). In addition,
no difference was seen in fibrosis improvement in the OCA groups compared to placebo. The baseline characteristics between the
patients in the Japanese Phase 2 trial conducted by Sumitomo Dainippon were distinct in a number of ways from those of the Western
patients included in the Phase 2b FLINT trial conducted by NIDDK. For example, differences were observed among the patient population
at baseline in relation to gender mix and metabolic factors like weight, diabetes status, dyslipidemia and hypertension. While
our REGENERATE trial was designed based on the results of the FLINT trial and is anticipated to enroll a predominantly Western
NASH patient population, the results of the FLINT trial may not be replicated in our REGENERATE trial. There is no assurance that
Sumitomo Dainippon will initiate any registrational trials in NASH and the results of any additional trial conducted by Sumitomo
Dainippon may not be an improvement as compared to those from the Phase 2 trial on Japanese NASH patients.
If we are unable to obtain
approval from the FDA, the EMA or other regulatory agencies for OCA and our other product candidates, or if, subsequent to approval,
we are unable to successfully commercialize OCA or our other product candidates, we will not be able to generate sufficient revenue
to become profitable or to continue our operations.
We are developing product
candidates for the treatment of rare diseases or diseases for which there are no or limited therapies, such as PBC, NASH and PSC,
and for some of which there is little clinical experience, and our development approach involves new endpoints and methodologies.
As a result, there is increased risk that we will not be able to gain agreement with regulatory authorities regarding an acceptable
development plan, the outcome of our clinical trials will not be favorable or that, even if favorable, regulatory authorities may
not find the results of our clinical trials to be sufficient for marketing approval.
We are focused on developing
therapeutics for the treatment of rare diseases and diseases for which there are no treatments. As a result, the design and conduct
of clinical trials for these diseases and other indications we may pursue will be subject to increased risk.
The FDA generally requires
two pivotal clinical trials to approve an NDA. Furthermore, for full approval of an NDA, the FDA requires a demonstration of efficacy
based on a clinical benefit endpoint. Under Subpart H regulations, the FDA can grant accelerated approval based on a surrogate
reasonably likely to predict clinical benefit. Even if results from our planned pivotal clinical trials for a specific indication
are highly significant and we believe reasonably likely to predict clinical benefit, the FDA may not accept the results of such
trials and grant accelerated approval of our product candidate for such indication.
Even if we receive accelerated
approval for any of our product candidates, we may be required to conduct a post-approval clinical outcomes trial to confirm the
clinical benefit of the product candidate by demonstrating the correlation of biochemical therapeutic response in patients with
a significant reduction in adverse clinical outcomes over time. If a confirmatory clinical outcomes trial is required, we may be
required to have the trial be substantially underway at the time we submit an NDA. It is possible that our NDA submission for regulatory
approval will not be accepted by the FDA for review or, even if it is accepted for review, that there may be delays in the FDA’s
review process and that the FDA may determine that our NDA does not merit the approval of the product candidate, in which case
the FDA may require that we conduct and/or complete additional clinical trials and preclinical studies before it will reconsider
our application for approval.
Following discussions
with regulatory authorities, we initiated our COBALT clinical outcomes confirmatory trial in PBC in December 2014 prior to the
approval of Ocaliva. The COBALT trial includes a cross-section of PBC patients with early, moderately advanced and advanced disease
according to the so-called Rotterdam criteria. We have agreed to evaluate the safety and efficacy of Ocaliva in patients with moderate
to severe hepatic impairment and as monotherapy in patients with PBC. We have agreed to similar requirements with the EMA as part
of the conditional approval of Ocaliva in PBC in Europe. We may be required to conduct other post-marketing studies based on our
regulatory interactions with other regulatory agencies across the world. There can be no assurance that our COBALT trial or other
trials conducted as part of our post-marketing obligations will confirm that the surrogate endpoints used for accelerated approval
will eventually show an adequate correlation with clinical outcomes. If any such trial fails to show such adequate correlation,
we may not be able to maintain our previously granted marketing approval for Ocaliva in PBC.
Our marketing authorization
in the European Union for Ocaliva for the treatment of PBC is not a full approval and is conditional on post-approval studies.
Our ability to obtain and maintain conditional marketing authorization in the European Union will be limited to specific circumstances
and subject to several conditions and obligations, if obtained at all, including the completion of one or more clinical outcome
trials to confirm the clinical benefit of Ocaliva in PBC. Conditional marketing authorizations based on incomplete clinical data
may be granted for a limited number of listed medicinal products for human use, including products designated as orphan medicinal
products under European Union law, if (1) the risk-benefit balance of the product is positive, (2) it is likely that the applicant
will be in a position to provide the required comprehensive clinical trial data, (3) unmet medical needs will be fulfilled and
(4) the benefit to public health of the immediate availability on the market of the medicinal product outweighs the risk inherent
in the fact that additional data are still required. Specific obligations, including with respect to the completion of ongoing
or new studies, and with respect to the collection of pharmacovigilance data, may be specified in the conditional marketing authorization.
Conditional marketing authorizations are valid for one year, and may be renewed annually, if the risk-benefit balance remains positive,
and after an assessment of the need for additional or modified conditions.
Our ongoing Phase 3 REGENERATE
trial of OCA in non-cirrhotic NASH patients with liver fibrosis, incorporates an interim primary surrogate endpoint that may serve
as the basis for a supplemental NDA filing for accelerated approval in the United States and approval in Europe. Accelerated approval
in the United States and conditional approval in the European Union for OCA in NASH are subject to similar risks as discussed above
in relation to OCA for PBC. The primary endpoint in the Phase 2b FLINT trial of OCA in NASH patients was based on liver biopsy
and was defined as an improvement of two or more points in the NAFLD activity score (a system of scoring the histopathological
features in the liver), or NAS, with no worsening of liver fibrosis. In contrast, upon the finalization of a protocol amendment
underway, the primary endpoint for the interim analysis for REGENERATE may be achieved based on one of: (i) the proportion of OCA-treated
patients relative to placebo achieving at least one stage of liver fibrosis improvement with no worsening of NASH or (ii) the proportion
of OCA-treated patients relative to placebo achieving NASH resolution with no worsening of liver fibrosis. Furthermore, we selected
a definition for NASH resolution for the trial, which defines a responder as a patient achieving a histologic score of 0 for ballooning
and 0 or 1 for inflammation. Currently, other biopharmaceutical companies are enrolling or have initiated trials in certain subpopulations
of NASH patients based on different endpoints from those in the FLINT and REGENERATE trials. Although the FDA acknowledged at recent
workshops the possibility of granting accelerated approval for NASH therapies using surrogate endpoints, with potential examples
including histological improvement, using the NAS or another scoring system, histological resolution of NASH, or improvements in
fibrosis in pre-cirrhotic patients with NASH, the FDA did not provide any formal regulatory guidance on approvable endpoints and
may not accept a surrogate endpoint for OCA for the treatment of NASH.
It is possible that if
we seek marketing approval of OCA for non-cirrhotic NASH patients with liver fibrosis based on the interim results of our REGENERATE
trial, our NDA submission may not be accepted by the FDA for review or, even if accepted for review, there may be delays in the
FDA’s review process and the FDA may determine that our NDA does not merit the approval of OCA for the treatment of non-cirrhotic
NASH patients. The FDA may also require that we continue our REGENERATE trial until its full completion to assess potential benefits
of OCA treatment on liver-related and other clinical outcomes. Our regulatory pathway for OCA for the treatment of NASH will depend
upon our discussions with the FDA and EMA. As a result, we may face difficulty in designing an acceptable registration strategy
around REGENERATE or any other trials in different subpopulations of NASH patients. In addition, since the design of the REGENERATE
trial deviates from that of the FLINT trial, there is an increased risk that the results of the REGENERATE trial would differ from
the FLINT results.
If we continue the development
of OCA in PSC, we intend to seek marketing approval based on a surrogate endpoint. The FDA and EMA have not validated any surrogate
endpoint as a basis for seeking approval in PSC and any surrogate endpoint we select may ultimately not be accepted by the regulatory
agencies.
The EMA and regulatory
authorities in other countries in which we may seek approval for, and market, OCA or our other product candidates may require additional
preclinical studies and/or clinical trials prior to granting approval. It may be expensive and time consuming to conduct and complete
additional preclinical studies and clinical trials that the FDA, EMA and other regulatory authorities may require us to perform.
As such, any requirement by the FDA, EMA or other regulatory authorities that we conduct additional preclinical studies or clinical
trials could materially and adversely affect our business, financial condition and results of operations. Furthermore, even if
we receive regulatory approval of OCA for the treatment of any of our targeted indications, the labeling for our product candidates
in the United States, Europe or other countries in which we have received or seek approval may include limitations that could impact
the commercial success of our product candidates.
Delays in the commencement,
enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory
approval for OCA and our other product candidates.
Delays in the commencement,
enrollment and completion of clinical trials could increase our product development costs or limit the regulatory approval of our
product candidates. We currently have underway a number of trials including our Phase 4 COBALT clinical outcomes confirmatory trial
of OCA in PBC, our Phase 3 REGENERATE trial of OCA in NASH and our Phase 2 CARE trial of OCA in biliary atresia. We continue to
work towards expanding our overall NASH development program with additional trials and studies, including a Phase 3 trial in NASH
patients with cirrhosis, which we expect to initiate in the second half of 2017, and we plan on conducting additional development
activities in other diseases. The results from these trials may not be available when we expect or we may be required to conduct
additional clinical trials or preclinical studies not currently planned to receive approval for OCA as a treatment for the related
indication. In addition, our clinical programs are subject to a number of variables and contingencies, such as the results of other
trials, patient enrollments or regulatory interactions that may result in a change in timing. As such, we do not know whether any
future trials or studies of our other product candidates will begin on time or will be completed on schedule, if at all.
The commencement, enrollment
and completion of clinical trials can be delayed or suspended for a variety of reasons, including:
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inability to obtain sufficient funds required for a clinical trial or lack of adequate funding
to continue the clinical trial due to unforeseen costs or other business decisions;
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inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms
of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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clinical holds, other regulatory objections to commencing or continuing a clinical trial or the
inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;
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discussions with the FDA or non-U.S. regulators regarding the scope or design of our clinical trials,
which may occur at various times, including subsequent to the initiation of the clinical trial;
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inability to identify and maintain a sufficient number of trial sites, many of which may already
be engaged in other clinical trial programs, including some that may be for the same indications targeted by our product candidates;
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the delay in receiving results from or the failure to achieve the necessary results in other clinical
trials;
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inability to obtain approval from institutional review boards, or IRBs, to conduct a clinical trial
at their respective sites;
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severe or unexpected drug-related adverse effects experienced by patients or any determination
that a clinical trial presents unacceptable health risks;
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a breach of the terms of any agreement with, or for any other reason by, current or future collaborators
that have responsibility for the clinical development of any of our product candidates, including Sumitomo Dainippon Pharma Co.,
Ltd., or Sumitomo Dainippon, or investigators leading clinical trials on our product candidates;
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inability to timely manufacture sufficient quantities of the product candidate required for a clinical
trial;
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difficulty recruiting and enrolling patients to participate in clinical trials for a variety of
reasons, including meeting the enrollment criteria for our trial, the rarity of the disease or the characteristics of the population
being studied, the risks of procedures that may be required as part of the trial, such as a liver biopsy, and competition from
other clinical trial programs for the same indications as our product candidates; and
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inability to retain enrolled patients after a clinical trial is underway.
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For example, our REGENERATE
trial is a large and complex Phase 3 clinical trial in a disease without any approved therapies and involves serial liver biopsies.
While we announced the completion of enrollment of the interim analysis cohort in May 2017, and continuously evaluate and implement
a variety of options to complete enrollment as quickly as possible, there can be no assurance that we will be able to enroll a
sufficient number of patients or complete the trial on a timely basis. As we engage in other large and complicated trials and trials
in advanced disease populations, we may experience a number of complications that may negatively affect our plans or our development
programs.
In addition, if we or
any of our collaborators are required to conduct additional clinical trials or other preclinical studies of our product candidates
beyond those contemplated, our ability to obtain regulatory approval of these product candidates and generate revenue from their
sales would be similarly harmed.
Clinical failure can
occur at any stage of clinical development. The results of earlier clinical trials are not necessarily predictive of future results
and any product candidate we, Sumitomo Dainippon or our potential future collaborators advance through clinical trials may not
have favorable results in later clinical trials or receive regulatory approval.
Clinical failure can occur
at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our collaborators
may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained
from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we
do, which may delay, limit or prevent regulatory approval. Success in preclinical studies and early clinical trials does not ensure
that subsequent clinical trials will generate the same or similar results or otherwise provide adequate data to demonstrate the
efficacy and safety of a product candidate. A number of companies in the pharmaceutical industry, including those with greater
resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials and at other stages of clinical
development, even after seeing promising results in earlier clinical trials.
In addition, the design
of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical
trial may not become apparent until the clinical trial is well-advanced. We may be unable to design and execute a clinical trial
to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible
to continue development efforts. If OCA or our other product candidates are found to be unsafe or lack efficacy for any indication,
we will not be able to obtain regulatory approval for them, and our prospects and business may be materially and adversely affected.
In some instances, there
can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to
numerous factors, including changes or differences in trial protocols, differences in composition of the patient populations, adherence
to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether
any Phase 2, Phase 3 or other clinical trials we or any of our collaborators may conduct will demonstrate consistent or adequate
efficacy and safety to obtain regulatory approval to market our product candidates. If we are unable to bring any of our current
or future product candidates to market, or to acquire any marketed, previously approved products, our ability to create long-term
stockholder value will be limited.
Although Ocaliva has received
accelerated approval in the United States and conditional approval in the European Union, its full approval depends on the results
of post-marketing clinical trials, including the Phase 4 COBALT trial. We cannot assure you that these trials will demonstrate
a correlation of biochemical therapeutic response in patients taking Ocaliva with a significant reduction in adverse clinical events
over time.
In December 2014, we received
comprehensive datasets from the FLINT trial, which met its primary endpoint with statistical significance. In October 2015, we
announced that the Phase 2 dose ranging trial of OCA in the Sumitomo Dainippon Phase 2 trial did not meet its primary endpoint
with statistical significance. In this trial, there was a dose dependent, although not statistically significant, increase in the
percentage of OCA treated patients compared to placebo who achieved the primary endpoint (p=0.053). In addition, no difference
was seen in fibrosis improvement in the OCA groups compared to placebo. The Phase 2 trial in NASH conducted in Japan by our collaborator
Sumitomo Dainippon involved different doses of OCA being administered to the trial subjects than those utilized in FLINT. Furthermore,
the baseline characteristics between the patients in the Japanese Phase 2 trial conducted by Sumitomo Dainippon were distinct in
a number of ways from those of the Western patients included in FLINT. While our REGENERATE trial was designed based on the results
of the FLINT trial and is anticipated to enroll a predominantly Western NASH patient population, the results of the FLINT trial
may not be replicated in our REGENERATE trial. In addition, since the design of the REGENERATE trial deviates from that of the
FLINT trial, there is an increased risk that the results of the REGENERATE trial would differ from the FLINT results. Even though
OCA has been granted breakthrough therapy designation by the FDA, we do not know if one pivotal clinical trial will be sufficient
for marketing approval or if regulators will agree to a surrogate endpoint for accelerated approval of OCA for the treatment of
NASH. As a result, it may take longer than anticipated to initiate and complete the Phase 3 REGENERATE trial or our Phase 3 program
in NASH for other patient subpopulations.
Our product candidates
may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require our product
candidates to be taken off the market, require them to include safety warnings or otherwise limit their sales.
OCA has been shown to
be a potent agonist of the farnesoid X receptor, or FXR. With the exception of the endogenous human bile acid chenodeoxycholic
acid, or CDCA, and cholic acid, there are no approved FXR agonists and the adverse effects from long-term exposure to this drug
class are unknown. Unforeseen side effects from any of our product candidates could arise either during clinical development or,
if approved, after the approved product has been marketed.
The most common side effects
observed in clinical trials of OCA in PBC were pruritus, or itching, fatigue, headaches, nausea, constipation and diarrhea. In
our POISE trial, pruritus, generally mild to moderate, was the most frequently reported adverse event associated with OCA treatment
and was observed in 38% of patients on placebo, 70% of patients in the 10 mg OCA group and 56% of patients in the OCA titration
group (5 mg to 10 mg). Eight patients discontinued due to pruritus, of whom none were in the placebo group, seven (10%) patients
were in the 10 mg OCA group and one (1%) patient was in the OCA titration group. Pruritus also has been observed in other clinical
trials of OCA. Decreases in HDL cholesterol were also observed during treatment in the POISE trial. In our Phase 2 trials for OCA
in PBC, a dose-response relationship was observed for the occurrence of liver-related adverse reactions, including jaundice, ascites
and primary biliary cholangitis flare with dosages of OCA of 10 mg once daily to 50 mg once daily (up to 5-times the highest recommended
dosage), as early as one month after starting treatment with OCA. The European label for Ocaliva also notes that elevations in
alanine amino transferase and aspartate aminotransferase were observed in patients treated with OCA.
Ocaliva is contraindicated
for PBC patients with complete biliary obstruction in the United States and the European Union. For patients with moderate or severe
hepatic impairment (Child Pugh B or C cirrhosis), who represent approximately 3% of PBC patients, the U.S. label for Ocaliva in
PBC includes an adjustment in the dosing regimen and the EU label recommends an adjusted dosing regimen due to potential exposure
levels in this population. For patients with HDL reductions and no response to Ocaliva after one year at the maximum tolerated
dose, the U.S. label asks prescribing physicians to weigh the risks against the benefits of continuing treatment.
In the course of our post-marketing
pharmacovigilance activities, deaths have been reported in PBC patients with moderate or severe hepatic impairment. In an analysis
performed by us and in consultation with the FDA, we concluded that these patients were prescribed once daily doses of Ocaliva,
which is seven times higher than the recommended weekly dose in such patients. As a result, we issued a dear healthcare provider
letter and the FDA also subsequently issued their own safety communication to reinforce recommended label dosing. Both communications
remind healthcare providers of the importance of the recommended reduced dosing of Ocaliva in PBC patients with moderate or severe
hepatic impairment, while reiterating the importance of close monitoring of PBC patients for progression of their disease and the
occurrence of liver-related adverse reactions. In addition to the DHCP letter, we have taken actions to enhance education about
appropriate use of Ocaliva. These initiatives include: reeducating physicians on the label, with a focus on ensuring appropriate
dosing for patients with moderate or severe hepatic impairment; enhancing monitoring of patients for liver-related adverse reactions;
and completing adjudication of all reported cases of serious liver injury, including in patients with no or mild hepatic impairment.
Pursuant to the FDA's safety communication, we have been working with the FDA on updates to the label to better ensure appropriate
and safe use of Ocaliva and anticipate the updated label by early 2018. These events may cause decreased demand for our product
candidates and loss of revenues.
Based on information in
the manuscript for the FLINT trial published in November 2014, pruritus occurred more frequently in the OCA treatment group than
in the placebo treatment group (23% vs. 6%, p < 0.001) and at a higher grade (predominately moderate pruritus), but resulted
in only one patient discontinuation in the OCA treatment group. In the FLINT trial, OCA treatment was associated with changes in
serum lipid levels, including increases in total cholesterol and LDL cholesterol and a decrease in HDL cholesterol, that were observed
within 12 weeks of initiating treatment, peaked and then decreased in magnitude while on treatment, and reversed further during
the 24-week post-treatment period. As previously disclosed, these changes in cholesterol levels, along with achieving the pre-defined
efficacy criteria, played a role in the decision of the FLINT data and safety monitoring board to terminate the treatment phase
of FLINT, and the publication of the FLINT results has noted the need for further study of these changes. There were two patient
deaths in the FLINT trial, and neither death was considered related to OCA treatment.
In the Phase 2 CONTROL
trial, OCA treatment in the absence of statin therapy over the first four weeks resulted in an increase in LDL across all OCA treatment
groups, while the placebo group was relatively unchanged. Treatment with atorvastatin beginning at week four and continuing through
week 16 reversed OCA-related increases in LDL to below baseline levels in all OCA treatment groups. Dose-dependent pruritus was
the most common adverse event in patients treated with OCA, occurring in 5% of patients on placebo, 5% of patients in the 5 mg
OCA group, 10% of patients in the 10 mg OCA group and 55% of patients in the 25 mg OCA group. All events were mild to moderate
and two patients discontinued treatment in the 25 mg OCA group due to pruritus. Over 95% of the patients completing the double-blind
phase of CONTROL enrolled in the long-term safety extension phase of the trial.
During
the ongoing LTSE phase of CONTROL, there has been one patient death due to acute renal and liver failure. While we determined it
could not be ruled out that this was possibly related to treatment, the principal investigator and the independent data safety
monitoring committee determined the death was unlikely related to OCA.
In our Phase 2 AESOP trial
of OCA in PSC, pruritus was the most common adverse event, occurring
in 46% of patients on
placebo, 60% of patients in the 1.5 mg to 3 mg OCA group and 67% of patients in the 5 mg to 10 mg OCA group, with the severity
increasing with dose. One (4%) patient in the 1.5 mg to 3 mg OCA group and three (12%) patients in the 5 mg to 10 mg OCA group
discontinued OCA due to pruritus compared to none in the placebo group.
Additional or unforeseen
side effects from OCA or any of our other product candidates could arise either during clinical development or, if approved, after
the approved product has been marketed. With the approval of Ocaliva in PBC, OCA will be used in an environment that is less rigorously
controlled than in clinical studies. If new side effects are found, if known side effects are shown to be more severe than previously
observed or if OCA is shown to have other unexpected characteristics, we may need to abandon our development of OCA for NASH, PSC,
biliary atresia and other potential indications. Furthermore, our commercial efforts for Ocaliva in PBC may be materially and adversely
affected.
The range and potential
severity of possible side effects from systemic therapies is significant. The results of future clinical trials may show that our
product candidates cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result
in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval
from the FDA and other regulatory authorities with restrictive label warnings.
In addition, our drug
candidates are being developed as potential treatments for severe, life threatening diseases and, as a result, our trials will
necessarily be conducted in a patient population that will be more prone than the general population to exhibit certain disease
states or adverse events. For example, as we expand our overall NASH development program, we intend to conduct trials in advanced
patient populations, such as in our planned Phase 3 trial in NASH patients with cirrhosis. Ocaliva is used in patients suffering
from various stages of PBC, which can be life threatening, and patients may suffer from other concomitant illnesses that may increase
the likelihood of certain adverse events. It may be difficult to discern whether certain events or symptoms observed during our
trials or in patients using commercial product were due to our drugs or drug candidates or some other factor, resulting in our
company and our development programs being negatively affected even if such events or symptoms are ultimately determined to be
unlikely related to our drugs and drug candidates. We further cannot assure you that additional or more severe adverse side effects
with respect to OCA will not develop in future clinical trials or commercial use, which could delay or preclude regulatory approval
of OCA or limit its commercial use.
If we or others later
identify undesirable or unacceptable side effects caused by our products or product candidates:
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regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication
or field alerts to physicians and pharmacies;
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we may be required to change instructions regarding the way the product is administered, conduct
additional clinical trials or change the labeling of the product;
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we may be subject to limitations on how we may promote the product;
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sales of the product may decrease significantly;
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regulatory authorities may require us to take our approved product off the market;
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we may be subject to litigation or product liability claims; and
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our reputation may suffer.
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Breakthrough therapy
designation for OCA may not lead to faster development or regulatory processes nor does it increase the likelihood that OCA will
receive marketing approval for NASH.
If a drug is intended
for the treatment of a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate
substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment
effects observed early in clinical development, the FDA may grant a breakthrough therapy designation. Breakthrough therapy designation
is intended to facilitate the development, and expedite the review of such drugs, but the breakthrough therapy designation does
not assure any such qualification or ultimate marketing approval by the FDA.
In January 2015, we received
breakthrough therapy designation for OCA in the treatment of NASH patients with fibrosis. However, there is no guarantee that the
receipt of breakthrough therapy designation will result in a faster development process, review or approval for OCA in fibrotic
NASH patients or increase the likelihood that OCA will be granted marketing approval for fibrotic NASH patients. Likewise, any
future breakthrough therapy designation for any other potential indication of OCA neither guarantees a faster development process,
review or approval nor improves the likelihood of the grant of marketing approval by FDA for any such potential indication of OCA
compared to drugs considered for approval under conventional FDA procedures. In addition, the FDA may withdraw any breakthrough
therapy designation at any time. We may seek a breakthrough therapy designation for other of our product candidates, but the FDA
may not grant this status to any of our proposed product candidates.
We may not be able
to obtain or maintain orphan drug exclusivity for our product candidates, if approved, which would cause our revenues to suffer.
Regulatory authorities
in some jurisdictions, including the United States and Europe, may designate drugs and biologics for relatively small patient populations
as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug or biologic intended
to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually
in the United States.
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, which precludes the EMA or the FDA from approving another marketing
application for the same product for that time period. The applicable period is seven years in the United States and ten years
in Europe. The European exclusivity period can be reduced to six years if a product no longer meets the criteria for orphan drug
designation or if the product is sufficiently profitable so that market exclusivity is no longer justified.
Orphan drug exclusivity
may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable
to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition. In addition, it
is possible that orphan marketing exclusivity attaching to the marketing authorization will be reduced to six years if, at the
end of the fifth year following the receipt of marketing authorization, the EMA and the Committee for Orphan Medicinal Products
determine that the product does not satisfy the requisite criteria including demonstration of significant clinical benefit (having
regard to requirements set out in the applicable EU regulations and guidance) where it is shown based on the available evidence
that the product is sufficiently profitable to justify not to maintain the marketing exclusivity.
The failure to maintain
orphan status may impact our ability to receive a premium price for OCA or our other products and may subject us to mandatory price
discounts in Europe. In addition, our ability to launch in Europe may be delayed and we may lose other benefits such as tax exemptions
for sales. As such, the loss of orphan drug status may have a negative effect on our ability to successfully commercialize our
products, earn revenues and achieve profitability.
Even if we obtain orphan
drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different products
can be approved for the same condition. Even after an orphan drug is approved, the FDA and EMA can subsequently approve the later
product for the same condition if the FDA concludes that the later product is clinically superior in that it is shown to be safer,
more effective or makes a major contribution to patient care.
If the FDA and EMA
and other regulatory agencies do not approve the manufacturing facilities of our future contract manufacturers for commercial production
on a timely basis or at all, we may not be able to commercialize any of our product candidates or commercialization of our product
candidates could be delayed.
We do not intend to manufacture
the pharmaceutical products that we plan to sell. We currently have agreements with a contract manufacturer for the production
of the active pharmaceutical ingredients and the formulation of sufficient quantities of drug product for commercial sales and
for our clinical trials and preclinical studies that we plan to conduct prior to and after seeking regulatory approval. If our
contract manufacturer should cease to provide services to us for any reason, we likely would experience delays in advancing our
clinical trials while we identify and qualify one or more replacement suppliers and we may be unable to obtain replacement supplies
on terms that are favorable to us.
We currently have a long-term
supply agreement with PharmaZell GMBH for the manufacture of commercial supply for Ocaliva. While we have procured sufficient supplies
for the commercial launch of Ocaliva in PBC, we may not be able to procure sufficient supplies of Ocaliva on a continued basis.
We are also seeking to qualify one or more back-up suppliers for our active ingredients; however, we may not be able to enter into
additional long-term commercial supply agreements for OCA with other third-party manufacturers. We do not have agreements for long-term
supplies of any of our other product candidates. We currently obtain these supplies and services from our third-party contract
manufacturers on a purchase order basis.
Additionally, the facilities
used by any contract manufacturer to manufacture OCA or any of our other product candidates must be the subject of a satisfactory
inspection before the FDA or the regulators in other jurisdictions approve the product candidate manufactured at that facility.
We are completely dependent on these third-party manufacturers for compliance with the requirements of U.S. and non-U.S. regulators
for the manufacture of our finished products. If our manufacturers cannot successfully manufacture material that conform to our
specifications and current good manufacturing practice requirements of any governmental agency whose jurisdiction to which we are
subject, our products or product candidates will not be approved or, if already approved, may be subject to recalls.
Reliance on third-party
manufacturers entails risks to which we would not be subject if we manufactured the products or product candidates, including:
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the possibility that we are unable to enter into or renew a manufacturing agreement with a third
party to manufacture OCA or our product candidates;
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the possible breach of the manufacturing agreements by the third parties because of factors beyond
our control; and
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the possibility of termination or nonrenewal of the agreements by the third parties before we are
able to arrange for a qualified replacement third-party manufacturer.
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Any of these factors could
cause the delay of approval or disruption of commercialization of our products or product candidates, cause us to incur higher
costs, prevent us from commercializing our products and product candidates successfully or disrupt the supply of our products after
commercial launch. Furthermore, if any of our product candidates are approved and contract manufacturers fail to deliver the required
commercial quantities of finished product on a timely basis and at commercially reasonable prices and we are unable to find one
or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes
and quality and on a timely basis, we would likely be unable to meet demand for our products and could lose potential revenue.
It may take several years to establish an alternative source of supply and to have any such new source approved by the government
agencies that regulate our products.
Even if our product
candidates receive regulatory approval, we will still be subject to strict regulatory requirements governing manufacturing and
marketing of our products and, as a result, we could face future development and regulatory difficulties.
Our product candidates,
if approved, will also be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion,
record-keeping and submission of safety and other post-market information. In addition, approved products, manufacturers and manufacturers’
facilities are required to comply with extensive FDA and EMA requirements and requirements of other similar agencies, including
ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMPs. As such,
we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMPs. Accordingly,
we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including
manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems,
if any, to the FDA and EMA and other similar agencies and to comply with certain requirements concerning advertising and promotion
for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory
restrictions and must be consistent with the information in the product’s approved label. Accordingly, we may not promote
our approved products such as Ocaliva for indications or uses for which they are not approved.
If a regulatory agency
discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems
with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may
impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates
fail to comply with applicable regulatory requirements, a regulatory agency may:
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mandate modifications to promotional materials or require us to provide corrective information
to healthcare practitioners;
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require us or our collaborators to enter into a consent decree or permanent injunction, which can
include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties
for noncompliance;
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impose other administrative or judicial civil or criminal penalties;
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withdraw regulatory approval;
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refuse to approve pending applications or supplements to approved applications filed by us, Sumitomo
Dainippon or our potential future collaborators;
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impose restrictions on operations, including costly new manufacturing requirements; or
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seize or detain products.
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Risks Related to the Commercialization
of Our Products
Reimbursement decisions
by third-party payors may have an adverse effect on pricing and market acceptance of Ocaliva or our product candidates, if approved.
If there is not sufficient reimbursement for our products or they are not covered at all, it is less likely that they will be widely
used.
Market acceptance and
sales of any products or product candidates that we develop will depend on reimbursement policies and may be affected by future
healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance
organizations, decide which drugs they will cover and establish payment levels. We cannot be certain that reimbursement will be
available for Ocaliva or any other products and product candidates that we develop. Also, reimbursement policies could reduce the
demand for, or the price paid for, our products. If reimbursement is not available or is available on a limited basis, we may not
be able to successfully commercialize Ocaliva or any other products or product candidates that we develop.
In the United States,
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, changed the way Medicare covers and pays for
pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription
drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class.
The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. Any negotiated
prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain.
Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage
policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result
in a similar reduction in payments from non-governmental payors.
In March 2010, the Patient
Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively,
ACA, became law in the United States. The goal of ACA is to reduce the cost of health care and substantially change the way health
care is financed by both governmental and private insurers. The ACA requires discounts under the Medicare drug benefit program
and increased the rebates paid by pharmaceutical companies on drugs covered by Medicaid. The ACA also imposes an annual fee, which
increases annually, on sales by branded pharmaceutical manufacturers. Following the November 2016 U.S. elections and the inauguration
of President Trump, uncertainty exists about the future of the coverage expansion provided by the ACA; while Congressional efforts
to repeal the ACA have not yet resulted in the passage of a bill, the President and congressional leaders continue to express interest
in repealing these ACA provisions and replacing them with alternatives that may be less costly and provide state Medicaid programs
and private health plans more flexibility. It is possible that these repeal and replacement initiatives, if enacted into law, could
ultimately result in fewer individuals having health insurance coverage and/or in individuals having insurance coverage with less
generous benefits. The scope of potential future legislation to repeal and replace ACA provisions is highly uncertain in many respects,
and it is possible that some of the ACA provisions that generally hurt the research-based pharmaceutical industry could also be
repealed along with ACA coverage expansion provisions; however, at this time the coverage expansion provisions of the ACA appear
most likely to be repealed and replaced.
In addition, third-party
payors attempt to contain health care costs by demanding price discounts or rebates and limiting both the types and variety of
drugs that they will cover and the amounts that they will pay for drugs. As a result, they may not cover or provide adequate payment
for our products. We might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products
or any other future products to such payors’ satisfaction. Such studies might require us to commit a significant amount of
management’s time and our financial and other resources. Our products might not ultimately be considered cost-effective.
Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate
return on our investment in product development. The market for a drug will depend significantly on access to third-party payors’
drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. Third-party payors may
refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a
less costly generic equivalent or other alternative is available, even if not approved for the indication for which the branded
drug is approved. In addition, due to there being no uniform policy of coverage and reimbursement in the United States among commercial
payors, coverage and reimbursement for pharmaceutical products may differ significantly from payor to payor.
We do not know if the
price we have selected for Ocaliva will receive broad acceptance from third-party payors. The coverage determination process may
be a time-consuming and costly process that requires us to provide scientific and clinical support for the use of Ocaliva in PBC
to each payor separately, with no assurance that coverage will be obtained. If we are unable to obtain adequate coverage of Ocaliva
from third-party payors, the adoption of Ocaliva by physicians and patients as a treatment for PBC may be limited. This in turn
could affect our ability to successfully commercialize Ocaliva and adversely impact our profitability, results of operations, financial
condition and future success.
Reimbursement in the European
Union and many other territories must be negotiated on a country-by-country basis and in many countries the product cannot be commercially
launched until reimbursement is approved. The timing to complete the negotiation process in each country is highly uncertain. While
we have been able to achieve rapid reimbursement decisions in some countries, as in the case in the United Kingdom, we expect that
it may still require a number of months before we receive a reimbursement decision in many other countries. Even after a price
is negotiated, countries frequently request or require adjustments to the price and other concessions over time or require approvals
regionally. Reimbursement agencies in Europe are often more conservative than those in the United States and the reimbursement
process is often slower since reimbursement decisions are made on a country-by-country basis. Prices for drugs in Europe generally
decrease over time.
The United States and
several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change
the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in
the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals
of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical
industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We
expect to experience pricing pressures in connection with the sale of OCA and any other products that we develop, due to the trend
toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. Pricing
pressures recently experienced by the pharmaceutical industry may be further exacerbated by legislative and policy changes under
consideration by the Trump administration.
Ocaliva and other product
candidates, if approved, may not achieve broad market acceptance among physicians, patients and healthcare payors, and as a result
our revenues generated from their sales may be limited.
The commercial success
of Ocaliva or our other products or product candidates that we develop, if approved, will depend upon their acceptance among the
medical community, including physicians, healthcare payors and patients. In order for Ocaliva to be commercially successful in
PBC, we will need to demonstrate its utility as a treatment for patients who have an inadequate response to or who are unable to
tolerate ursodiol, referred to as second line treatment, and show that it is more effective than any other alternatives that may
be developed as a second line treatment for PBC, particularly given the much higher price that we charge for Ocaliva compared to
the price of generically available ursodiol. Ocaliva also must be shown to be a safe and tolerable treatment in a commercial use
setting as it is intended to be a lifetime therapy for patients eligible for treatment. In NASH and PSC, since there are currently
no approved therapies, we do not know the degree to which OCA will be accepted as a therapy, even if approved.
The degree of market acceptance
of our product candidates will depend on a number of factors, including:
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limitations or warnings contained in our product candidates’ FDA or EMA-approved labeling;
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changes in the standard of care or availability of alternative therapies at similar or lower costs
for the targeted indications for any of our product candidates, such as ursodiol for the treatment of PBC;
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limitations in the approved clinical indications for our product candidates;
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demonstrated clinical safety and efficacy compared to other products;
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lack of significant adverse side effects;
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sales, marketing and distribution support;
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availability of reimbursement from managed care plans and other third-party payors;
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timing of market introduction and perceived effectiveness of competitive products;
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the degree of cost-effectiveness;
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availability of alternative therapies at similar or lower cost, including generics and over-the-counter
products;
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the extent to which our product candidates are approved for inclusion on formularies of hospitals
and managed care organizations;
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whether our product candidates are designated under physician treatment guidelines for the treatment
of the indications for which we have received regulatory approval;
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adverse publicity about our product candidates or favorable publicity about competitive products;
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convenience and ease of administration of our product candidates; and
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potential product liability claims.
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In addition, the potential
market opportunity for our products and product candidates is difficult to precisely estimate. While ursodiol is the established
standard of care for PBC, a majority of patients while on therapy remain at ALP levels above the upper limit of normal, or ULN.
According to our analysis of industry data in PBC, approximately 65% of patients treated with ursodiol experience elevated ALP
levels, with approximately 35% of patients experiencing ALP levels greater than 1.67 times ULN. In addition, a small minority of
PBC patients (estimated at approximately 3% of patients) are intolerant to ursodiol therapy. Our estimates of the potential market
opportunity for Ocaliva for the treatment of PBC include a number of key assumptions related to prevalence rates, patients’
access to healthcare, diagnosis rates and patients’ response to or tolerance of OCA, which are based on available literature
and epidemiology research in PBC, our industry knowledge gained through market research and other methods, industry publications,
third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, no independent source
has verified such assumptions. If any of these assumptions prove to be inaccurate, then the actual market for Ocaliva in PBC could
be smaller than our estimates of our potential market opportunity. If the actual market opportunity for Ocaliva or our product
candidates is smaller than we expect, our product revenue may be limited.
If our product candidates
are approved, but do not achieve an adequate level of acceptance by physicians, patients, the medical community and healthcare
payors, sufficient revenue may not be generated from these products and we may not become or remain profitable. In addition, efforts
to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources
and may never be successful.
We have limited sales,
marketing or distribution experience and we will have to invest in significant additional resources to develop those capabilities
or enter into acceptable third-party sales and marketing arrangements.
We have limited sales,
marketing or distribution experience as a commercial organization. The commercial launch of Ocaliva for PBC represents our first
product launch. We also plan to commercialize Ocaliva for PBC in certain other countries outside of the United States and Europe
ourselves with a targeted sales force if we receive marketing approval. We may utilize the services of third-party collaborators
in certain other jurisdictions. We have not yet decided on our commercialization strategy for OCA in other indications and for
our other product candidates. To develop internal sales, distribution and marketing capabilities, we have invested and expect to
continue to invest significant additional amounts of financial and management resources.
Recruiting and training
a commercial organization is expensive and time consuming and could delay any product launch. If the commercial launch of a product
candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur
for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our
investment could be lost if we cannot retain or reposition our sales and marketing personnel.
For product candidates
where we decide to perform sales, marketing and distribution functions ourselves or through third parties, we could face a number
of additional risks, including:
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we or our third-party sales collaborators may not be able to attract and build, or retain an effective
marketing or sales force;
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the cost of securing or establishing a marketing or sales force may exceed the revenues generated
by any products; and
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our direct sales and marketing efforts may not be successful.
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We have a collaboration
with Sumitomo Dainippon for the development and commercialization of OCA in Japan, China, South Korea and potentially other Asian
countries, if approved, and may elect to seek additional strategic collaborators for our product candidates. We may have limited
or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily
on the success of the efforts of these third parties.
If we market products
in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject
to civil or criminal penalties.
In addition to FDA restrictions
on marketing of pharmaceutical products, several other types of state and federal healthcare laws, commonly referred to as “fraud
and abuse” laws, have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry.
Other jurisdictions such as Europe have similar laws and are enacting more stringent regulations. These laws include false claims
and anti-kickback statutes. If we market our products and our products are paid for by governmental programs, it is possible that
some of our business activities could be subject to challenge under one or more of these laws.
Federal false claims laws
prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government
or knowingly making, or causing to be made, a false statement to get a false claim paid. The federal healthcare program anti-kickback
statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce,
or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service
covered by Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers on the one hand and prescribers, purchasers or formulary managers on the other. Although there
are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions
and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending
may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Most states also have statutes or regulations
similar to the federal anti-kickback law and federal false claims laws, which apply to items and services covered by Medicaid and
other state programs, or, in several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be
imposed under these federal and state laws.
Over the past few years,
a number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and
marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to
prescribers; reporting inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging
in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid
rebates.
We will incur significant
liability if it is determined that we are promoting any “off-label” use of Ocaliva.
Physicians are permitted
to prescribe drug products for uses that are not described in the product’s labeling and that differ from those approved
by the FDA or other applicable regulatory agencies. Off-label uses are common across medical specialties. Although the FDA and
other regulatory agencies do not regulate a physician’s choice of treatments, the FDA and other regulatory agencies do restrict
communications on the subject of off-label use. Companies are not permitted to promote drugs for off-label uses. Accordingly, we
may not promote Ocaliva in the United States for use in any indications other than for the treatment of patients with PBC in combination
with ursodiol in adults with an inadequate response to ursodiol or as monotherapy in adults unable to tolerate ursodiol. The FDA
and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting promotion of off-label uses
and the promotion of products for which marketing approval has not been obtained. A company that is found to have improperly promoted
off-label uses will be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.
A significant number of pharmaceutical companies have been the target of inquiries and investigations by various governmental authorities
in the United States and abroad.
Notwithstanding the regulatory
restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful, non-misleading,
and non-promotional scientific exchange concerning their products. We intend to continue engaging in medical education activities
and communicate with healthcare providers in compliance with all applicable laws, regulatory guidance and industry best practices.
While we have implemented
a corporate compliance program based on what we believe are the current best practices, we cannot provide any assurance that governmental
authorities will find that our business practices comply with current or future administrative or judicial interpretations of potentially
applicable laws and regulations. If we fail to comply with any of these laws and regulations, we could be subject to a range of
regulatory actions, including suspension or termination of clinical trials, the failure to approve a product candidate, restrictions
on our products or manufacturing processes, withdrawal of Ocaliva or other products from the market, significant fines, disqualification
or debarment from participation in federally-funded healthcare programs or other sanctions or litigation, any of which events may
have a significant adverse impact on our business.
If any of our current
strategic collaborators fails to perform its obligations or terminates its agreement with us, the development and commercialization
of the products or product candidates under such agreement could be delayed or terminated and our business could be substantially
harmed.
We currently have strategic
collaborations in place relating to certain of our product candidates. We entered into an exclusive license agreement with Sumitomo
Dainippon regarding the development and commercialization of Ocaliva for PBC and OCA for NASH in Japan, China and South Korea and
provided Sumitomo Dainippon with an option to extend its exclusive license to different indications as well as certain other Asian
countries. These strategic collaborations may not be scientifically or commercially successful due to a number of important factors,
including the following:
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Sumitomo Dainippon has significant discretion in determining the efforts and resources that each
will apply to its strategic collaboration with us. The timing and amount of any cash payments, milestones and royalties that we
may receive under such agreement will depend on, among other things, the efforts, allocation of resources and successful development
and commercialization of our product candidates by Sumitomo Dainippon under the agreement;
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Our agreement with Sumitomo Dainippon restricts it from developing or commercializing any FXR agonist
to treat PBC or NASH during the term of the agreement other than pursuant to the Sumitomo Dainippon agreement. Subject to these
restrictions, it is possible that Sumitomo Dainippon may develop and commercialize, either alone or with others, or be acquired
by a company that has, products that are similar to or competitive with the product candidates that it licenses from us;
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Sumitomo Dainippon may change the focus of its development and commercialization efforts or pursue
higher-priority programs;
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Sumitomo Dainippon may, under specified circumstances, terminate its strategic collaborations with
us on short notice and for circumstances outside of our control, which could make it difficult for us to attract new strategic
collaborators or adversely affect how we are perceived in the scientific and financial communities;
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Sumitomo Dainippon has, under certain circumstances, the right to maintain or defend our intellectual
property rights licensed to them in their territories, and, although we may have the right to assume the maintenance and defense
of our intellectual property rights if our strategic collaborator does not, our ability to do so may be compromised by our strategic
collaborator’s acts or omissions;
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Sumitomo Dainippon may utilize our intellectual property rights in such a way as to invite litigation
that could jeopardize or invalidate our intellectual property rights or expose us to potential liability; and
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Sumitomo Dainippon may not comply with all applicable regulatory requirements, or fail to report
safety data in accordance with all applicable regulatory requirements.
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If Sumitomo Dainippon
fails to develop or effectively commercialize OCA, we may not be able to replace it with another collaborator. For example, there
is no assurance that Sumitomo Dainippon will initiate any registrational trials in NASH and the results of any additional trial
conducted by Sumitomo Dainippon may not be an improvement as compared to those from the Phase 2 trial on Japanese NASH patients.
We may also be unable to obtain, on terms acceptable to us, a license from such strategic collaborator to any of its intellectual
property that may be necessary or useful for us to continue to develop and commercialize a product candidate. Any of these events
could have a material adverse effect on our business, results of operations and our ability to achieve future profitability, and
could cause our stock price to decline.
We may not
be successful in establishing and maintaining development and commercialization collaborations, which could adversely affect our
ability to develop certain of our product candidates and our financial condition and operating results.
Because developing pharmaceutical
products, conducting clinical trials, obtaining regulatory approval, expanding manufacturing capabilities and marketing approved
products are expensive, we have entered into, and may seek to enter into, collaborations with companies that have more experience
and resources than we have. For example, we have entered into a collaboration with Sumitomo Dainippon for OCA. We may establish
additional collaborations for development and commercialization of OCA in territories outside of those licensed by Sumitomo Dainippon
and for other product candidates and research programs, including INT-767 and INT-777. Additionally, if any of our product candidates
receives marketing approval, we may enter into sales and marketing arrangements with third parties with respect to our unlicensed
territories. If we are unable to maintain our existing arrangements or enter into any new such arrangements on acceptable terms,
if at all, we may be unable to effectively market and sell our products in our target markets. We expect to face competition in
seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and
implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement
collaborations or other alternative arrangements for the development of our product candidates.
When we collaborate with
a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control
over the future success of that product candidate to the third party. For example, Sumitomo Dainippon has the exclusive rights
to OCA in Japan, China and South Korea and a right of first refusal to license OCA in several other Asian countries. Our collaboration
partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization.
The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration
that we enter into, including our collaboration with Sumitomo Dainippon, may be unsuccessful in the development and commercialization
of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of
a product candidate or research program under a collaboration arrangement, and the payment we receive from our collaboration partner
may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators for
our product candidates, we would face increased costs, we may be forced to limit the number of our product candidates we can commercially
develop or the territories in which we commercialize them and we might fail to commercialize products or programs for which a suitable
collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition will
be materially and adversely affected.
If we fail to develop
OCA for additional indications, our commercial opportunity will be limited.
To date, we have focused
the majority of our development efforts on the development of OCA. Among our other product candidates, only INT-767 is currently
in clinical development. One of our strategies is to pursue clinical development of OCA in NASH and other progressive non-viral
liver diseases, to the extent that we have sufficient funding.
PBC is an orphan disease.
Since Ocaliva is indicated for use in PBC in combination with ursodiol in adults with an inadequate response to ursodiol or as
monotherapy in adults unable to tolerate ursodiol, the market size is expected to be limited. Furthermore, because a significant
proportion of PBC patients do not exhibit any symptoms at the time of diagnosis, PBC may be left undiagnosed for a significant
period of time. Due to these factors, our ability to grow revenues will be dependent on our ability to successfully develop and
commercialize OCA for the treatment of additional indications. In particular, we believe that our future success will depend in
large part on the results of our development of OCA for the treatment of NASH. Although NASH is believed to be one of the most
prevalent chronic liver diseases worldwide, NASH may be left undiagnosed for a long time and a definitive diagnosis of NASH is
currently based on a histological assessment of a liver biopsy, which impacts the ability to easily identify patients. Furthermore,
even if we are successful in developing and obtaining marketing approval of OCA for the treatment of NASH, we may not be able to
commercialize OCA successfully.
The completion of development,
securing of approval and commercialization of OCA for additional indications will require substantial additional funding and is
prone to the risks of failure inherent in drug development. We cannot provide you any assurance that we will be able to successfully
advance any of these indications through the development process. Even if we receive FDA or EMA approval to market OCA for the
treatment of any of these additional indications, we cannot assure you that any such additional indications will be successfully
commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are
unable to successfully develop and commercialize OCA for these additional indications, our commercial opportunity will be limited
and our business prospects will suffer.
Risks Related to Our Business
and Strategy
We face competition
from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.
The biotechnology and
pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors
in the United States, Europe and other jurisdictions, including major multinational pharmaceutical companies, established biotechnology
companies, specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of our competitors
have greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing
organizations. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory
approvals, recruiting patients and manufacturing pharmaceutical products. These companies also have significantly greater research,
sales and marketing capabilities and collaborative arrangements in our target markets with leading companies and research institutions.
Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license
novel compounds that could make the product candidates that we develop obsolete. As a result of all of these factors, our competitors
may succeed in obtaining patent protection and/or FDA or EMA approval or discovering, developing and commercializing drugs for
the diseases that we are targeting before we do. Smaller or early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large, established companies.
Some of the pharmaceutical
and biotechnology companies we expect to compete with include Allergan Plc, AstraZeneca plc, Acorda Therapeutics, Inc., Boehringer
Ingelheim GmbH, Bristol-Myers Squibb Company, Conatus Pharmaceuticals Inc., Cymabay Therapeutics, Inc., Dr. Falk Pharma GmbH, Durect
Corporation, Enanta Pharmaceuticals, Inc., ENYO Pharma SAS, Galectin Therapeutics Inc., Galmed Medical Research Ltd., Genfit SA,
Gilead Sciences, Inc., GlaxoSmithKline, Immuron Ltd., Islet Sciences, Inc., Madrigal Pharmaceuticals, Inc., Metacrine, Inc., MiNA
Therapeutics, NGM Biopharmaceuticals, Novartis International AG, Novo Nordisk A/S, Shire plc, Viking Therapeutics, Inc. and Zydus
Pharmaceuticals Inc. Bezafibrate, a fibrate that has not been approved for commercialization by the FDA and is only available outside
of the United States, has been studied in multiple clinical trials for the treatment of liver diseases including PBC and NASH.
Genfit SA has an ongoing Phase 3 clinical trial of GFT505, a dual PPAR alpha/delta agonist, in NASH. Genfit is also studying GFT505
for the treatment of PBC. Gilead Sciences, Inc. is conducting multiple Phase 3 clinical trials in NASH patients of various disease
severity with selonsertib, an inhibitor of the apoptosis signal-regulating kinase 1. Gilead Sciences, Inc. is also exploring additional
studies in NASH for GS-0976, a small molecule allosteric inhibitor that acts at the protein-protein homodimer interface of acetyl-CoA
carboxylases acquired from Nimbus Therapeutics, LLC, and an FXR agonist known as GS-9674. Gilead Sciences, Inc. is also studying
a number of compounds in other liver diseases including PBC and PSC. Allergan Plc has an ongoing Phase 3 clinical trial of cenicriviroc,
an immunomodulator that blocks C-C chemokine receptor type 2 and type 5, for the treatment of NASH. A number of other companies
have trials in PBC, NASH and other liver diseases we are targeting.
In addition, many universities
and private and public research institutes may become active in our target disease areas. The results from our POISE and FLINT
trials and the approval of Ocaliva for PBC have brought more attention to our targeted indications and bile acid chemistry. As
a result, we believe that additional companies and organizations may seek to compete with us in the future. Our competitors may
succeed in developing, acquiring or licensing on an exclusive basis, technologies and drug products that are more effective or
less costly than OCA or any other product candidates that we are currently developing or that we may develop, which could render
our products obsolete and noncompetitive.
Off-label uses of other
potential treatments may limit the commercial potential of our product candidates, especially given the pricing of Ocaliva and
the anticipated pricing for our product candidates. For example, while fibrates are not approved for use in PBC, off-label use
of fibrate drugs has been reported, though many fibrates are specifically contraindicated for use in PBC due to potential concerns
over acute and long-term safety in this patient population. In NASH, a number of treatments, including vitamin E (an antioxidant),
insulin sensitizers (such as metformin), antihyperlipidemic agents (such as gemfibrozil), pentoxifylline and ursodiol, are used
off-label. Although none of these treatments have been clearly shown in clinical trials to alter the course of the disease, in
a previous study conducted by the NASH Clinical Research Network, similar improvements to those observed with OCA in the FLINT
trial in certain histological measures of NASH were reported with vitamin E and pioglitazone. Various other treatments, both approved
and unapproved, have been used in the other indications we are targeting.
We believe that our ability
to successfully compete will depend on, among other things:
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the results of our and our strategic collaborators’ clinical trials and preclinical studies;
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our ability to recruit and enroll patients for our clinical trials;
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the efficacy, safety and reliability of Ocaliva and our other product candidates;
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the speed at which we develop our product candidates;
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our ability to design and successfully execute appropriate clinical trials;
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our ability to maintain a good relationship with regulatory authorities;
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the timing and scope of regulatory approvals, if any;
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our ability to commercialize and market any of our product candidates that receive regulatory approval;
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the price of our products;
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adequate levels of reimbursement under private and governmental health insurance plans, including
Medicare;
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our ability to protect intellectual property rights related to our products;
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our ability to manufacture and sell commercial quantities of any approved products to the market;
and
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acceptance of our product candidates by physicians and other health care providers.
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If our competitors market
products that are more effective, safer or less expensive than our future products, if any, or that reach the market sooner than
our future products, if any, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized
by rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast
of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete
effectively. Technological advances or products developed by our competitors may render our technologies or product candidates
obsolete, less competitive or not economical.
We depend on third-party
contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed
these functions ourselves.
We outsource and plan
to continue to outsource substantial portions of our operations to third-party service providers, including the conduct of preclinical
studies and clinical trials, collection and analysis of data and manufacturing. Although we are currently commercializing Ocaliva
using our internal commercial organization, we will likely use the services of third-party vendors in relation to our future commercialization
activities, including product sales, marketing and distribution. Our agreements with third-party service providers are on a study-by-study
and/or project-by-project basis. Typically, we may terminate the agreements with notice and are responsible for the supplier’s
previously incurred costs. In addition, a number of third-party service providers that we retain will be subject to the FDA’s
and EMA’s regulatory requirements and similar standards outside of the United States and Europe and we do not have control
over compliance with these regulations by these providers. Consequently, if these providers do not adhere to applicable governing
practices and standards, the development and commercialization of Ocaliva and our other product candidates could be delayed or
stopped, which could severely harm our business and financial condition.
Because we have relied
on third parties, our internal capacity to perform these functions is limited to management oversight. Outsourcing these functions
involves the risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to
perform at all. In the past, we experienced difficulties with a third-party contract manufacturer for OCA, including delays in
receiving adequate clinical trial supplies as requested within the requested time periods. We subsequently replaced this manufacturer
with other third-party contract manufacturers for OCA. It is possible that we could experience similar difficulties in the future.
In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which
could increase the risk that this information will be misappropriated. There are a limited number of third-party service providers
that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance
of third-party service providers can be difficult, time consuming and cause delays in our development programs. Despite our recent
growth, we currently have a small number of employees, which limits the internal resources we have available to identify and monitor
third-party service providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party
service providers in the future, our business may be adversely affected. We may further be subject to the imposition of civil or
criminal penalties if their conduct of clinical trials violates applicable law.
Our third-party service
providers generally are not prohibited from providing their services to other biopharmaceutical companies, including companies
that currently or may in the future compete with us. For example, certain of our third-party service providers and consultants
may be able to develop intellectual property to which we are not entitled under our agreements which may eventually be used to
develop products that compete with our products. Although we generally have confidentiality and non-disclosure agreements in place
with our third-party service providers and consultants, such third parties may be able to provide services to other companies without
violating the terms of our agreements. In addition, although we may seek to enter into non-compete arrangements with our key third-party
service providers, such arrangements are difficult to negotiate and we may be unable to successfully enter into such arrangements.
A variety of risks
associated with our international business operations and our planned international business relationships could materially adversely
affect our business.
We have a wholly-owned
subsidiary in the United Kingdom which serves as our headquarters for our international operations. We have also formed a number
of other wholly-owned subsidiaries in Europe and Canada in preparation for the anticipated commercial launch of Ocaliva in PBC
in those jurisdictions. Although we are currently commercializing Ocaliva using our internal commercial organization, we will likely
use the services of third-party vendors in relation to our future commercialization activities, including product sales, marketing
and distribution. In addition, we have entered into collaborations with Sumitomo Dainippon for the development of OCA, and we may
enter into agreements with other third parties for the development and commercialization of OCA or our other product candidates
in international markets. Our international operations and business relationships subject us to additional risks that may materially
adversely affect our ability to attain or sustain profitable operations, including:
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differing regulatory requirements for drug approvals internationally;
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potentially reduced protection for intellectual property rights;
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potential third-party patent rights in countries outside of the United States;
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the potential for so-called “parallel importing,” which is what occurs when a local
seller, e.g., a pharmacy, faced with relatively high local prices, opts to import goods from another jurisdiction with relatively
low prices, rather than buying them locally;
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unexpected changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability, particularly in non-U.S. economies
and markets, including several countries in Europe;
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compliance with tax, employment, immigration and labor laws for employees traveling abroad;
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taxes in other countries;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenue,
and other obligations incident to doing business in another country;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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production shortages resulting from events affecting raw material supply or manufacturing capabilities
abroad; and
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business interruptions resulting from geo-political actions, including war and terrorism, or natural
disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.
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For example, we do not
know the extent of the impact that the Brexit will have on our business. As a result of the Brexit, it is possible that Scotland
and Northern Ireland may each conduct a referendum to decide whether to leave the United Kingdom. Furthermore, other European countries
may seek to conduct referenda with respect to continuing membership with the European Union. We do not know to what extent these
changes will impact our business. Our ability to conduct our international business out of the United Kingdom may be materially
and adversely affected.
Changes in our effective
income tax rate could adversely affect our results of operations.
We are subject to income
taxes in the United States and various foreign jurisdictions. Various factors may have favorable or unfavorable effects on our
effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax
laws and rates, the accounting for stock options and other stock-based compensation, changes in accounting standards, future levels
of research and development spending, changes in the mix and level of pre-tax earnings by taxing jurisdiction, the outcome of examinations
by the U.S. Internal Revenue Service and regulators of other jurisdictions, the accuracy of our estimates for unrecognized tax
benefits, the realization of deferred tax assets, or by changes to our ownership or capital structure. The impact on our effective
income tax rate resulting from the above-mentioned factors and others may be significant and could adversely affect our results
of operations.
We have been significantly
expanding our operations and the size of our company and will need to continue our expansion to support our NASH program. We may
experience difficulties in managing our significant growth.
From December 31, 2014
to December 31, 2016, our employee base has grown from 136 to 456 employees. As we advance our programs for OCA in NASH and other
potential indications and our other product candidates, seek regulatory approval in the United States and elsewhere, increase the
number of ongoing product development programs and advance our product candidates through preclinical studies and clinical trials,
we will need to increase our product development, scientific and administrative headcount to manage these programs. We will also
need to grow our commercial capabilities, which will require us to hire additional personnel for the launch and ongoing marketing
and sale of Ocaliva in PBC and any product candidate for which we obtain marketing approval. In addition, in order to continue
to meet our obligations as a public company and to support the anticipated longer-term growth in the other functions at our company,
we will need to increase our general and administrative capabilities. We are also expanding our operations geographically and formed
a number of wholly-owned subsidiaries outside of the United States. In addition to our U.S. offices, we also have an office in
London, United Kingdom which serves as our headquarters for our operations in Europe and international markets, and regional offices
in a number of these countries. In the longer term, we may further expand our geographical footprint. Our management, personnel
and systems currently in place may not be adequate to support this future growth. Furthermore, we may face a number of complexities,
such as being subject to national collective bargaining agreements for employees, in some of the countries in which we operate.
Our need to effectively
manage our operations, growth and various projects requires that we:
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successfully attract and recruit new employees or consultants with the expertise and experience
we will require in the United States, Europe and in other jurisdictions;
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manage our clinical programs effectively, which we anticipate being conducted at numerous clinical
sites across the world, and advance our other development efforts;
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develop and expand our marketing and sales infrastructure; and
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continue to improve our operational, financial and management controls, reporting systems and procedures.
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If we are unable to successfully
manage this growth and increased complexity of operations, our business may be adversely affected.
We may not be able
to manage our business effectively if we are unable to attract and retain key personnel and consultants.
We may not be able to
attract or retain qualified personnel and consultants across our organization due to the intense competition for qualified personnel
and consultants among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel
and consultants to accomplish our business objectives, we may experience constraints that will significantly impede the achievement
of our development and commercial objectives, our ability to raise additional capital and our ability to implement our business
strategy.
Our industry has experienced
a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization
and business development expertise of Mark Pruzanski, our co-founder and president and chief executive officer, and our other key
employees and consultants. If we lose one or more of our executive officers, or key employees or consultants, our ability to implement
our business strategy successfully could be seriously harmed. Any of our executive officers or key employees or consultants may
terminate their employment at any time. Replacing executive officers, key employees and consultants may be difficult and may take
an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience
required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire and retain employees
and consultants from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key
personnel and consultants.
We have scientific and
clinical advisors and consultants, such as our co-founder Professor Roberto Pellicciari, who assist us in formulating our research,
development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to us and typically they will not enter into non-compete agreements
with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services.
In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies
that may compete with ours.
Failure to establish
and maintain adequate finance infrastructure and accounting systems and controls could impair our ability to comply with the financial
reporting and internal controls requirements for publicly traded companies.
As a public company, we
operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002, and
the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting
requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing
and maintaining corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures.
Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial
fraud.
Our compliance with Section
404 of the Sarbanes-Oxley Act has required and will continue to require that we incur substantial accounting expense and expend
significant management efforts. Our testing, or the testing by our independent registered public accounting firm, may reveal deficiencies
in our internal controls that we would be required to remediate in a timely manner so as to be able to comply with the requirements
of Section 404 of the Sarbanes-Oxley Act each year. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley
Act in a timely manner each year, we could be subject to sanctions or investigations by the Securities and Exchange Commission,
the NASDAQ Stock Market or other regulatory authorities which would require additional financial and management resources and could
adversely affect the market price of our common stock. Furthermore, if we cannot provide reliable financial reports or prevent
fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.
Our employees may engage
in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading,
which could significantly harm our business.
We are exposed to the
risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations
of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with health care fraud
and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized
activities to us. In particular, sales, marketing and business arrangements in the health care industry are subject to extensive
laws and regulations in the United States and abroad intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive
practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales
commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use
of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation.
Misconduct and misappropriation of confidential information by our employees or third parties may also include improper trading
in our securities, which may harm our reputation and result in enforcement actions against us. We have adopted a global code of
business conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect
and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions
are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a
significant impact on our business, including the imposition of significant fines or other sanctions.
We face potential product
liability exposure, and if successful claims are brought against us, we may incur substantial liability for our products and product
candidates and may have to limit their use.
The use of our product
candidates in clinical trials and the sale of any products for which we may obtain marketing approval, such as Ocaliva in PBC,
expose us to the risk of product liability claims. Product liability claims may be brought against us or our collaborators by participants
enrolled in our clinical trials, patients, health care providers or others using, administering or selling our products. If we
cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual
outcome, product liability claims may result in:
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withdrawal of clinical trial participants;
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termination of clinical trial sites or entire trial programs;
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costs of related litigation;
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substantial monetary awards to patients or other claimants;
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decreased demand for our product candidates and loss of revenues;
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impairment of our business reputation;
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diversion of management and scientific resources from our business operations; and
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the inability to commercialize our product candidates or the withdrawal of our products from the
market.
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We have obtained limited
product liability insurance coverage in the United States for the use of OCA in our U.S. clinical trials and commercial sales and
in selected other jurisdictions where we are conducting clinical trials. Our product liability insurance coverage in the United
States is currently limited to an aggregate of $10 million. We have clinical trial and commercial product liability insurance coverage
outside of the United States in amounts that vary by country. As such, our insurance coverage may not reimburse us or 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 product liability. We intend to expand our insurance coverage for products to include the sale of commercial
products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially
reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action
lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against
us, particularly if judgments exceed our insurance coverage, could decrease our cash resources and adversely affect our business.
Our insurance policies
are expensive and only protect us from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance
for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability,
employment practices liability, property, auto, workers’ compensation, products liability and directors’ and officers’
insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage. Any significant
uninsured liability may require us to pay substantial amounts, which would adversely affect our financial position and results
of operations. Furthermore, the increased volatility of our stock price may result in us being required to pay substantially higher
premiums for our directors’ and officers’ insurance than those to which we are currently subject, and may even lead
a large number of underwriters to be unwilling to cover us.
If we engage in an
in-license transaction, acquisition, reorganization or business combination, we will incur a variety of risks that could adversely
affect our business operations or our stockholders.
From time to time, we
have considered, and we will continue to consider in the future, strategic business initiatives intended to further the expansion
and development of our business. These initiatives may include in-licensing or acquiring products, technologies or business or
entering into a business combination with another company. If we pursue such a strategy, we could, among other things:
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issue equity securities that would dilute our current stockholders’ percentage ownership;
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incur substantial debt that may place strains on our operations;
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spend substantial operational, financial and management resources to integrate new products, technologies
or businesses;
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assume substantial actual or contingent liabilities;
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reprioritize our development programs and even cease development and commercialization of our product
candidates; or
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merge with, or otherwise enter into a business combination with, another company in which our stockholders
would receive cash and/or shares of the other company on terms that certain of our stockholders may not deem desirable.
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Although we intend to
evaluate and consider in-license transactions, acquisitions, reorganizations and business combinations in the future, we have no
agreements or understandings with respect to any acquisition, reorganization or business combination at this time.
Our business and operations
would suffer in the event of system failures or data breaches.
Despite the implementation
of security measures and policies, our internal information technology systems, as well as those of our CROs and other third parties
on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication
and electrical failures. Information security risks have significantly increased in recent years in part due to the proliferation
of new technologies and the increased sophistication and activities of organized crime, hackers, terrorists and other external
parties, including foreign state actors. As cyber threats continue to evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Although to date we have not experienced any
material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer
such losses in the future. If such an event were to occur and cause interruptions in our operations, it could result in a material
disruption of our drug development programs, damage to our reputation and/or monetary damages. For example, the loss of clinical
trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss
of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur
liability and the further development of our product candidates could be delayed.
Our information security
systems are subject to laws and regulations requiring that we take measures to protect the privacy and security of certain information
we gather and use in our business. For example, the Health Insurance Portability and Accountability Act, or HIPAA, and its implementing
regulations impose, among other requirements, certain regulatory and contractual requirements regarding the privacy and security
of personal health information. In addition to HIPAA, numerous other federal and state laws, including, without limitation, state
security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern
the collection, use, disclosure and storage of personal information.
Various foreign countries
where we may process personal information also have, or are developing, laws governing the collection, use, disclosure and storage
of personal information. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there
has been an increasing amount of focus on privacy and data protection issues that may affect our business. In July 2016, U.S. and
European Commission officials adopted a new framework called the EU-U.S. Privacy Shield to govern cross-border flows of personal
data. We adopted the EU-U.S. Privacy Shield and certified to its requirements in October 2016. In May 2018, the General Data Protection
Regulation (“GDPR”) will supersede current EU data protection legislation, impose more stringent EU data protection
requirements, and provide for greater penalties for noncompliance. While we are actively employing the EU-U.S. Privacy Shield as
a means to legitimize the transfer of personal information from the EU and Switzerland to the United States, and are engaging in
activities to comply with the GDPR requirements, we may be unsuccessful in these efforts.
Risks Related to Our Intellectual
Property
It is difficult and
costly to protect our proprietary rights, and we may not be able to ensure their protection. If our patent position does not adequately
protect our products and product candidates, others could compete against us more directly, which would harm our business, possibly
materially.
Our commercial success
will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future products
and product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party
challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products and product
candidates is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover
these activities.
The patent positions of
biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important
legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has
emerged to date in the United States or in many jurisdictions outside of the United States. Changes in either the patent laws or
interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly,
we cannot predict the breadth of claims that may be enforced in the patents that may be issued from the applications we currently
own or may own in the future, or license from third parties. Further, if any patents we obtain or license are deemed invalid and
unenforceable, our ability to commercialize or license our technology could be adversely affected.
Others have filed, and
in the future are likely to file, patent applications covering products and technologies that are similar or competitive to ours
or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over
patent applications filed or in-licensed by us, or that we or our licensors will not be involved in infringement, interference,
derivation, opposition or invalidity proceedings before U.S. or non-U.S. patent offices. Our patents may also be challenged under
other proceedings, such as
inter partes review
and post-grant review proceedings introduced by provisions of the
America Invents Act.
The degree of future protection
for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights
or permit us to gain or keep our competitive advantage. For example:
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others may be able to develop a platform similar to, or better than, ours in a way that is not
covered by the claims of our patents;
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others may be able to make compounds that are similar to our products and product candidates but
that are not covered by the claims of our patents;
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we might not have been the first to make the inventions covered by our pending patent applications;
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we might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies;
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any patents that we obtain may not provide us with any competitive advantages;
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we may not develop additional proprietary technologies that are patentable; or
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the patents of others may have an adverse effect on our business.
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As of September 30, 2017,
we were the owner of record of over 110 issued or granted U.S. and non-U.S. patents relating to OCA with claims directed to pharmaceutical
compounds, pharmaceutical compositions, methods of making these compounds, and methods of using these compounds in various indications.
We were also the owner at that date of record of over 100 pending U.S. and non-U.S. patent applications relating to OCA in these
areas.
In addition, as of September
30, 2017, we were the owner of record of approximately 220 issued or granted U.S. and non-U.S. patents relating to our product
candidates other than OCA, with claims directed to pharmaceutical compounds, pharmaceutical compositions, methods of making these
compounds and methods of using these compounds in various indications. We were also the owner of record of approximately 70 pending
U.S. and non-U.S. patent applications relating to such other product candidates in these areas.
Patents covering the composition
of matter of OCA expire in 2022 at the soonest and 2033 at the latest if the appropriate maintenance renewal, annuity, or other
government fees are paid. We expect that the other patents in the OCA portfolio, if the appropriate maintenance, renewal, annuity
or other governmental fees are paid, would expire from 2022 to 2033. We expect the issued INT-767 composition of matter patent
in the United States, if the appropriate maintenance, renewal, annuity or other governmental fees are paid, to expire in 2029.
We expect the other patents in the INT-767 portfolio, if the appropriate maintenance, renewal, annuity or other governmental fees
are paid, to expire from 2027 to 2029. We expect the issued INT-777 composition of matter patent in the United States, if the appropriate
maintenance, renewal, annuity or other governmental fees are paid, to expire in 2030. We expect the other patents in the INT-777
portfolio, if the appropriate maintenance, renewal, annuity or other governmental fees are paid, to expire from 2028 to 2030.
We have received assignments
of rights to the INT-767 patent portfolio from all inventors, with the exception of one inventor. That inventor is contractually
obligated to provide an assignment to us. Thus, we believe that we are the owner of the INT-767 patent portfolio by virtue of this
contractual obligation and the patent assignments we have received. By virtue of the patent assignments we have received and other
contractual obligations owed to us, we believe we are the owner of the INT-777 patent portfolio. Without patent protection on the
composition of matter of our products and product candidates, our ability to stop others from using or selling our products and
product candidates may be limited.
Due to the patent laws
of a country, or the decisions of a patent examiner in a country, or our own filing strategies, we may not obtain patent coverage
for all of our products and product candidates or methods involving these candidates in the parent patent application. We plan
to pursue divisional patent applications or continuation patent applications in the United States and other countries to obtain
claim coverage for inventions which were disclosed but not claimed in the parent patent application.
If we do not obtain
protection under the Hatch-Waxman Act and similar legislation outside of the United States by extending the patent terms and obtaining
data exclusivity for our products and product candidates, our business may be materially harmed.
Depending upon the timing,
duration and specifics of FDA marketing approval of our products and product candidates, U.S. patents may be eligible for limited
extension of patent term under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman
Act. The Hatch-Waxman Act permits an extension of patent term of up to five years as compensation for patent term lost during product
development and the FDA regulatory review process. However, an extension may not be granted because of, for example, failure to
apply within applicable deadlines, failure to apply prior to expiration of relevant patents or failure to satisfy applicable requirements.
Moreover, the applicable time period or the scope of patent protection afforded could be less than what is requested. If we are
unable to obtain patent term extension or restoration or the term of any such extension is less than we request, the period during
which we will have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing
products following our patent expiration, and our revenue could be reduced, possibly materially.
Our primary composition
of matter patent for OCA expires in 2022. In light of the U.S. marketing approval of OCA in PBC in May 2016, we have applied for
an extension to the patent term for this patent in the United States through 2027. We expect to take similar actions in other jurisdictions
and countries where similar regulations exist. In the event that we are unable to obtain any patent term extensions, the issued
composition of matter patents for OCA are expected to expire in 2022 at the soonest and 2033 at the latest, assuming they withstand
any challenge. We expect that the other patents for the OCA portfolio, if the appropriate maintenance, renewal, annuity or other
governmental fees are paid, would expire from 2022 to 2033.
We may incur substantial
costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
If we choose to go to
court or engage in other adversarial proceedings to stop another party from using the inventions claimed in any patents we obtain,
that individual or company has the right to ask the court or adjudicating body to rule that such patents are invalid, not infringed,
or should not be enforced against that third party. These lawsuits and proceedings are expensive and would consume time and resources
and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such
patents. In addition, there is a risk that the court or adjudicating body will decide that such patents are not valid or not infringed,
and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity
of such patents is upheld, the court or adjudicating body will refuse to stop the other party on the ground that such other party’s
activities do not infringe our rights to such patents. In addition, the U.S. Supreme Court has modified some tests used by the
U.S. Patent and Trademark Office, or USPTO, in granting patents over the past 20 years, which may decrease the likelihood that
we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license.
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 product candidates.
Our success will depend
in part on our ability to operate without infringing the proprietary rights of third parties. We cannot guarantee that our products,
or manufacture or use of our product candidates, will not infringe third-party patents. Furthermore, a third party may claim that
we or our manufacturing or commercialization collaborators are using inventions covered by the third party’s patent rights
and may go to court to stop us from engaging in our normal operations and activities, including making or selling our products
and product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial
and scientific personnel. There is a risk that a court would decide that we or our commercialization collaborators are infringing
the third party’s patents and would order us or our collaborators to stop the activities covered by the patents. In that
event, we or our commercialization collaborators may not have a viable way around the patent and may need to halt commercialization
of the relevant product. In addition, there is a risk that a court will order us or our collaborators to pay the other party damages
for having violated the other party’s patents. In the future, we may agree to indemnify our commercial collaborators against
certain intellectual property infringement claims brought by third parties. The pharmaceutical and biotechnology industries have
produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various
types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation
is not always uniform.
If we are sued for patent
infringement, we would need to demonstrate that our products or methods either do not infringe the patent claims of the relevant
patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example,
in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity
enjoyed by issued patents. 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, which may not be available, 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 fail to obtain a license, develop or obtain non-infringing
technology or defend an infringement action successfully, or have infringed patents declared invalid, we may incur substantial
monetary damages, encounter significant delays in bringing our products and product candidates to market and be precluded from
manufacturing or selling our products and product candidates.
We cannot be certain that
others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent
the technology, because:
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some patent applications in the United States may be unpublished or otherwise maintained in secrecy
until the patents are issued;
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patent applications in the United States are typically not published until 18 months after the
priority date; and
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publications in the scientific literature often lag behind actual discoveries.
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Our competitors may have
filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have
priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies.
If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference
or derivation proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings
could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently
arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect
to such inventions. Other countries have similar laws that permit secrecy of patent applications, and such patent applications
may be entitled to priority over our applications in such jurisdictions.
Some of our competitors
may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material
adverse effect on our ability to raise the funds necessary to continue our operations.
Obtaining and maintaining
our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed
by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees,
renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO
and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or
applications. We have systems in place to remind us to pay these fees, and we employ a third-party service provider and rely on
this service provider to pay these fees due to the USPTO and non-U.S. patent agencies. The USPTO and various non-U.S. governmental
patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the
patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent
lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations
in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete
loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this
circumstance would have a material adverse effect on our business.
We may be subject to
claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. If we are not able
to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could
be significantly diminished.
As is common in the biotechnology
and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies,
including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently
or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary
to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial
costs and be a distraction to management.
We rely on trade secrets
to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However,
trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside
scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information.
These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the
event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets
and proprietary information. For example, in September 2016, the Department of Health and Human Services adopted new regulations
mandating sponsors to publicly post certain data from clinical trials of products subject to FDA regulation. Although the implementation
of the regulations may be delayed, this and other transparency initiatives may result in making publicly available information
we may consider to be trade secrets or proprietary information. Moreover, the EMA has already adopted a policy of general transparency
both in relation to requests under EU freedom of information legislation for access to pre-clinical and clinical research data
once marketing authorizations are granted and through proactive disclosure of clinical data on its website. This policy coupled
with imminent requirements for public disclosure of clinical research data under a new EU Clinical Trial Regulation, means that
public disclosure will ordinarily be made of substantial research data that previously would have been considered commercially
confidential. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time
consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect
trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Costly and time-consuming
litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade
secret protection could adversely affect our competitive business position.
We have not yet registered
all of our trademarks and failure to secure those registrations could adversely affect our business.
We have applied for and
obtained a number of trademarks and service marks to further protect the proprietary position of our products. As of September
30, 2017, we have over 580 trademark and service mark registrations and over 290 pending trademark and service mark applications
in the United States and abroad. Our trademark applications may not be allowed for registration or our registered trademarks may
not be maintained or enforced. During prosecution of applications for trademark registration, we may receive rejections or refusals.
Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition,
in the USPTO and in comparable agencies in many other jurisdictions, third parties are given an opportunity to oppose pending trademark
applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings have been filed and may in the
future be filed against certain of our trademarks, and our trademarks may not survive such proceedings. If we do not secure registrations
for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.
Trademark protection varies
in accordance with local law, and continues in some countries as long as the trademark is used and in other countries as long as
the trademark is registered. Trademark registrations generally are for fixed but renewable terms. We cannot provide any assurances
that any trademarks or service marks will be sufficient to prevent competitors from adopting similar names. The adoption of similar
names by competitors could impede our ability to build brand identity and lead to customer confusion, which could adversely affect
our sales or profitability.
We have received approval from both the FDA and EMA for
Ocaliva®, the proprietary name for OCA, as well as the associated logo. The Ocaliva trademarks have registered in jurisdictions,
including the United States, member states of the Community Trademark, Australia, Great Britain, New Zealand, Norway, Switzerland,
Taiwan and certain other countries.
Risks Related to Our Indebtedness
Servicing our debt
will require significant amounts of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled
payments of the principal of, to pay interest on or to refinance the $460.0 million aggregate principal amount of 3.25% convertible
senior notes due 2023 we issued in July 2016, or convertible notes or any indebtedness we or our subsidiaries may incur in the
future depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control.
Our business may not generate cash flow from operations in the future sufficient to service our debt, including the convertible
notes. If we are unable to generate cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring
debt or obtaining additional equity capital on terms that may be unfavorable to us or highly dilutive. Our ability to refinance
our indebtedness will depend on the capital markets and our financial condition at the time we seek to refinance such indebtedness.
We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in
a default on our debt obligations.
We may incur substantially
more debt or take other actions which would affect our ability to pay the principal of and interest on our debt.
We and our subsidiaries
may be able to incur substantial additional debt in the future, some of which may be secured debt. We and our subsidiaries will
not be restricted under the terms of the indenture governing the convertible notes from incurring additional debt, securing existing
or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture
governing the convertible notes that could have the effect of diminishing our ability to service our debt when due.
The conditional conversion
feature of the convertible notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional
conversion feature of the convertible notes is triggered, holders will be entitled to convert their convertible notes at any time
during specified periods at their option. If one or more holders elect to convert their convertible notes, unless we elect to satisfy
our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional
share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely
affect our liquidity. In addition, even if holders do not elect to convert their convertible notes, we could be required under
applicable accounting rules to reclassify all or a portion of the outstanding principal of the convertible notes as a current rather
than long-term liability, which would result in a material reduction of our net working capital.
The accounting method
for convertible debt securities that may be settled in cash, such as the convertible notes, is the subject of recent changes that
could have a material effect on our reported financial results.
Under Accounting Standards
Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account
for the liability and equity components of the convertible debt instruments (such as the convertible notes) that may be settled
entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of
ASC 470-20 on the accounting for the convertible notes is that the equity component is required to be included in the additional
paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component
would be treated as original issue discount for purposes of accounting for the debt component of the convertible notes. As a result,
we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization
of the discounted carrying value of the convertible notes to their face amount over the term of the convertible notes. We will
report lower net income in our financial results because ASC 470-20 will require interest to include both the current period’s
amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future
financial results, the trading price of our common stock and the trading price of the convertible notes.
In addition, under certain
circumstances, convertible debt instruments (such as the convertible notes) that may be settled entirely or partly in cash are
currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of
the convertible notes will not be included in the calculation of diluted earnings per share except to the extent that the conversion
value of the notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the
transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected
to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit
the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon
conversion of the convertible notes, then our diluted earnings per share would be adversely affected.
Provisions in the indenture
governing the convertible notes may deter or prevent a business combination that may be favorable to you.
If a fundamental change
occurs prior to the maturity date of the convertible notes, holders of the convertible notes will have the right, at their option,
to require us to repurchase all or a portion of their convertible notes. In addition, if a make-whole fundamental change occurs
prior to the maturity date of the convertible notes, we will in some cases be required to increase the conversion rate for a holder
that elects to convert its convertible notes in connection with such make-whole fundamental change. Furthermore, the indenture
governing the convertible notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving
entity assumes our obligations under the convertible notes and the indenture. These and other provisions in the indenture could
deter or prevent a third party from acquiring us even when the acquisition may be favorable to you.
Risks Related to Ownership
of Our Common Stock
An active trading market
in our common stock may not be maintained.
The trading market in
our common stock has been extremely volatile. The quotation of our common stock on The NASDAQ Global Select Market does not assure
that a meaningful, consistent and liquid trading market will exist. We cannot predict whether an active market for our common stock
will be maintained in the future. An absence of an active trading market could adversely affect our stockholders’ ability
to sell our common stock at current market prices in short time periods, or possibly at all. Additionally, market visibility for
our common stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock.
As of September 30, 2017, approximately 30.1% of our outstanding shares of common stock was held by our officers, directors, beneficial
owners of 5% or more of our securities (other than FMR LLC, Carmignac Gestion, Capital World Investors, Ameriprise Financial, Inc.
and their respective affiliates) and their respective affiliates, which adversely affects the liquidity of the trading market for
our common stock, in as much as federal securities laws restrict sales of our shares by these stockholders. If our affiliates continue
to hold their shares of common stock, there will be limited trading volume in our common stock, which may make it more difficult
for investors to sell their shares or increase the volatility of our stock price.
We were previously,
and are currently, subject to securities class action litigation and may be subject to similar or other litigation in the future,
which may divert management’s attention.
We have previously been
subject to securities class action lawsuits. In February 2014, two purported securities class actions were filed against us and
certain of our officers, which were eventually consolidated. In May 2016, the defendants reached an agreement with the lead plaintiff
to seek Court approval of a proposed resolution and the settlement was ultimately granted final approval by the Court in September
2016. While the final judgment and order of the Court included a dismissal of the action with prejudice against all defendants
and the defendants did not admit any liability as part of the settlement, the total payment aggregated to $55.0 million, of which
$10.0 million was paid by our insurers.
A lawsuit has been filed
alleging, among other things, that we and certain of our officers violated federal securities laws by making allegedly material
false and/or misleading statements regarding our business, operational and compliance policies. The plaintiff seeks unspecified
monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. While we
believe we have meritorious defenses and intent to rigorously defend ourselves, we cannot predict the outcome of this lawsuit.
There may be additional
suits or proceedings brought in the future. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming
for our management and detracts from our ability to fully focus our internal resources on our business activities, and we cannot
predict how long it may take to resolve these matters. In addition, we may incur substantial legal fees and costs in connection
with litigation. Although we may receive insurance coverage for certain adversarial proceedings, coverage could be denied or prove
to be insufficient. It is possible that we could, in the future, incur judgment or enter into settlement of claims for monetary
damages. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse
effect on our business, results of operations and financial condition.
Our stock price has
been and may in the future be volatile, which could cause holders of our common stock and the Convertible Notes to incur substantial
losses.
The trading price of our
common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in response to
various factors, some of which are beyond our control. Since our initial public offering which occurred in October 2012, the price
of our common stock on The NASDAQ Global Select Market has ranged from $17.96 per share to $497.00 per share. In addition to the
other factors discussed in this “Risk Factors” section, these factors include:
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failure to successfully commercialize Ocaliva for PBC in jurisdictions where we have received marketing
authorization or our inability to receive marketing approval for Ocaliva in other jurisdictions;
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adverse results or delays in our clinical trials;
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inability to obtain additional funding;
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any delay in filing an IND, NDA, MAA or comparable submission for any of our products and product
candidates and any adverse development or perceived adverse development with respect to the regulatory review of such submission;
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failure to successfully develop and commercialize OCA for indications other than PBC and any of
our other product candidates;
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inability to obtain adequate product supply for OCA and our future product candidates or the inability
to do so at acceptable prices;
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results of clinical trials of our competitors’ products;
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regulatory actions with respect to our products or our competitors’ products;
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changes in laws or regulations applicable to our products or future products;
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failure to meet or exceed financial projections we may provide to the public;
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failure to meet or exceed the estimates and projections of the investment community;
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actual or anticipated fluctuations in our financial condition and operating results;
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actual or anticipated changes in our growth rate relative to our competitors;
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actual or anticipated fluctuations in our competitors’ operating results or changes in their
growth rate;
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competition from existing products or new products that may emerge;
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announcements by us, our collaborators or our competitors of significant acquisitions, strategic
collaborations, joint ventures, collaborations or capital commitments;
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issuance of new or updated research or reports by securities analysts;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
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additions or departures of key management or scientific personnel;
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disputes or other developments related to proprietary rights, including patents, litigation matters
and our ability to obtain patent protection for our technologies;
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announcement or expectation of additional financing efforts;
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significant lawsuits, including patent, stockholder or product liability litigation, involving
us;
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sales of our common stock by us, our insiders or our other stockholders;
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failure to adopt appropriate information security systems, including any systems that may be required
to support our growing and changing business requirements;
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market conditions for biopharmaceutical stocks in general; and
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general economic, industry and market conditions.
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Furthermore, the stock
markets in general and the market for biotechnology companies in particular have experienced extreme price and volume fluctuations
that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have
been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations,
as well as general economic, political and market conditions such as recessions, interest rate changes or international currency
fluctuations may negatively impact the market price of shares of our common stock, regardless of our actual operating performance.
In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class
action litigation. We have been in the past, and may be in the future, the target of this type of litigation, which could result
in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
As a result of this volatility, our stockholders could incur substantial losses.
We have a significant
stockholder, which will limit your ability to influence corporate matters, may give rise to conflicts of interest and could result
in future substantial sales of shares of our common stock into the market.
Genextra S.p.A., together
with its affiliates, whom we refer to collectively as Genextra, is our largest stockholder. As of September 30, 2017, Genextra
owned 6,454,953 shares of our common stock. The shares of common stock owned by Genextra represented approximately 25.7% of our
outstanding common stock as of September 30, 2017. Accordingly, Genextra exerts and will continue to exert significant influence
over us and any action requiring the approval of the holders of our common stock, including the election of directors and amendments
to our organizational documents, such as increases in our authorized shares of common stock and approval of significant corporate
transactions. This concentration of voting power makes it less likely that any other holder of common stock or directors of our
business will be able to affect the way we are managed and could delay or prevent an acquisition of us on terms that other stockholders
may desire.
Furthermore, the interests
of Genextra may not always coincide with your interests or the interests of other stockholders, and Genextra may act in a manner
that advances its best interests and not necessarily those of other stockholders, including seeking a premium value for its common
stock, and might affect the prevailing market price for our common stock. Our board of directors, which consists of nine directors,
including one associated with Genextra, has the power to set the number of directors on our board from time to time.
Genextra also may sell
share of our common stock into the market from time to time. If we in the future engage in a registered offering of our common
stock, we could also determine, as we have done in the past, to register for sale a portion of Genextra’s shares as part
of that same offering to provide for the orderly sale of such shares. We cannot predict the effect, if any, that future sales
by Genextra may have on the market price for our common stock.
Our disclosure controls
and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the
periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that
information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated
to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people
or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements
or insufficient disclosure due to error or fraud may occur and not be detected.
You may experience
future dilution as a result of future equity offerings or strategic transactions.
In the future, we may
issue additional shares of our common stock or other securities convertible into or exchangeable for our common stock in order
to raise additional capital or in connection with strategic transactions, including potential in-licenses or acquisitions of products,
technologies or businesses. We cannot assure you that we will be able to sell shares or other securities in any other offering
at a price per share that is equal to or greater than the price per share you paid for our shares. If we issue securities in connection
with a strategic transaction, we cannot assure you that the value of the assets we receive will be commensurate with the value
of the securities we may issue, Investors purchasing or otherwise acquiring shares or other securities from us in the future could
have rights, preferences or privileges senior to those of existing stockholders and you may experience dilution. You may also incur
additional dilution upon the exercise of any outstanding stock options or vesting of restricted stock units or awards.
If securities or industry
analysts cease publishing research or reports about us, our business or our market, or if they publish inaccurate or unfavorable
reports about our stock, the price of our stock and trading volume could decline.
The trading market for
our common stock depends in part on the research and reports that securities or industry analysts publish about our company. We
do not have any control over these analysts, and there can be no assurance that analysts will continue to cover us or provide favorable
coverage. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research
about our business, our stock price would likely decline. If one or more of the analysts covering us fail to regularly publish
reports on us, demand for our common stock could decline, which could cause our stock price and trading volume to decline.
Anti-takeover provisions
in our restated certificate of incorporation and our restated bylaws, as well as provisions of Delaware law, might discourage,
delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our
common stock.
Provisions in our restated
certificate of incorporation and restated bylaws, as well as provisions of Delaware law, contain provisions that may discourage,
delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions
in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate
attempts by our stockholders to replace or remove our management. Our corporate governance documents include provisions:
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authorizing the issuance of “blank check” convertible preferred stock, the terms of
which may be established and shares of which may be issued without stockholder approval;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to
be taken at a meeting of our stockholders, to the extent that no stockholder, together with its affiliates, holds more than 50%
of our voting stock;
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eliminating the ability of stockholders to call a special meeting of stockholders;
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permitting our board of directors to accelerate the vesting of outstanding equity awards upon certain
transactions that result in a change of control; and
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establishing advance notice requirements for nominations for election to the board of directors
or for proposing matters that can be acted upon at stockholder meetings.
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In addition, as a Delaware
corporation, we are subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, or DGCL,
which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations
without approval of the holders of substantially all of our outstanding common stock. Any provision of our restated certificate
of incorporation or restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit
the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price
that some investors are willing to pay for our common stock.
The existence of the foregoing
provisions and anti-takeover measures may also frustrate or prevent any attempts by our stockholders to replace or remove our current
management or members of our board of directors and could limit the price that investors might be willing to pay in the future
for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that
you could receive a premium for your common stock in an acquisition.
Claims for indemnification
by our directors and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce
the amount of money available to us.
As permitted by Section
102(b)(7) of the DGCL, our restated certificate of incorporation limits the liability of our directors to the fullest extent permitted
by law. In addition, as permitted by Section 145 of the DGCL, our restated certificate of incorporation and restated bylaws provide
that we shall indemnify, to the fullest extent authorized by the DGCL, each person who is involved in any litigation or other proceeding
because such person is or was a director or officer of our company or is or was serving as an officer or director of another entity
at our request, against all expense, loss or liability reasonably incurred or suffered in connection therewith. Our restated certificate
of incorporation provides that the right to indemnification includes the right to be paid expenses incurred in defending any proceeding
in advance of its final disposition, provided, however, that such advance payment will only be made upon delivery to us of an undertaking,
by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director
is not entitled to indemnification. If we do not pay a proper claim for indemnification in full within 60 days after we receive
a written claim for such indemnification, except in the case of a claim for an advancement of expenses, in which case such period
is 20 days, our restated certificate of incorporation and our restated bylaws authorize the claimant to bring an action against
us and prescribe what constitutes a defense to such action.
Section 145 of the DGCL
permits a corporation to indemnify any director or officer of the corporation against expenses (including attorney’s fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding
brought by reason of the fact that such person is or was a director or officer of the corporation, if such person acted in good
faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, if he or she had no reason to believe his or her conduct was unlawful. In a derivative
action (i.e., one brought by or on behalf of the corporation), indemnification may be provided only for expenses actually and reasonably
incurred by any director or officer in connection with the defense or settlement of such an action or suit if such person acted
in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be provided if such person shall have been adjudged to be liable to the corporation, unless
and only to the extent that the court in which the action or suit was brought shall determine that the defendant is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of liability.
The rights conferred in
the restated certificate of incorporation and the restated bylaws are not exclusive, and we are authorized to enter into indemnification
agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons. We have entered
into indemnification agreements with each of our officers and directors.
The above limitations
on liability and our indemnification obligations limit the personal liability of our directors and officers for monetary damages
for breach of their fiduciary duty as directors by shifting the burden of such losses and expenses to us. Although we have increased
the coverage under our directors’ and officers’ liability insurance, certain liabilities or expenses covered by our
indemnification obligations may not be covered by such insurance or the coverage limitation amounts may be exceeded. As a result,
we may need to use a significant amount of our funds to satisfy our indemnification obligations, which could severely harm our
business and financial condition and limit the funds available to stockholders who may choose to bring a claim against our company.
Our ability to use
our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2016,
we had net operating loss carryforwards, or NOLs, for U.S. Federal income tax purposes of $562.3 million, which expire between
2024 and 2036. We also have certain state and foreign NOLs in varying amounts depending on the different state and foreign tax
laws.
Our ability to utilize
our NOLs may be limited under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, or similar
rules. The Section 382 limitations apply if an “ownership change” occurs. Generally, an ownership change occurs when
certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage
in a testing period (typically three years). We have evaluated whether one or more ownership changes under Section 382 have occurred
since our inception and have determined that there have been at least two such changes. Although we believe that these ownership
changes have not resulted in material limitations on our ability to use these NOLs, our ability to utilize these NOLs may be limited
due to future ownership changes or for other reasons. Additionally, tax laws limit the time during which NOLs and certain other
tax attributes may be utilized against future taxes. As a result, we may not be able to take full advantage of our carryforwards
for U.S. federal, state, and foreign tax purposes.