Item 1A. Risk Factors.
The following description of risk factors include any material changes to, and supersedes the description of, risk factors associated with our business
previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (SEC) on March 16, 2017, under the heading Risk Factors. Our
business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our
actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial
condition, operating results and the price of our common stock.
The following discussion of risk factors contains forward-looking statements.
These risk factors may be important to understanding any statement in this Quarterly Report on Form 10-Q or elsewhere. The following information should be read in conjunction with the consolidated financial statements and related notes in Part I,
Item 1, Financial Statements and Part I, Item 2, Managements, Discussion and Analysis of Financial Condition and Results of Operations.
Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should not
be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business and Commercialization of Our Product Candidates
We are a clinical-stage cell therapy company with a limited operating history of developing late-stage product candidates. There is a limited amount of
information about us upon which to evaluate our product candidates and business prospects, making an investment in our common stock unsuitable for many investors.
We are a clinical-stage cell therapy company, formed in 2000, with a limited operating history. Since inception we have devoted substantially all of our
resources to the development of our cell therapy technology platform, the clinical and preclinical advancement of our product candidates, the creation, licensing and protection of related intellectual property rights and the provision of general and
administrative support for these operations. We have not yet obtained regulatory approval for any product candidates in any jurisdiction or generated any significant revenues from product sales. If NeoCart or any of our future product candidates
fails in clinical trials or preclinical development, or does not gain regulatory approval, or if our product candidates following regulatory approval, if any, do not achieve market acceptance, we may never become profitable or sustain profitability.
We commenced our first clinical trial in 2005, and we have a limited operating history developing clinical-stage cell therapies upon which you can
evaluate our business and prospects. In addition, besides our current ongoing Phase 3 clinical trial we have never conducted clinical trials of a size required for regulatory approvals. Further, we have not yet demonstrated an ability to
successfully
26
overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, such as cell therapy. For example, to execute our current business plan we
will need to successfully:
|
|
|
execute our research and development strategies, including successfully completing our clinical trial program for NeoCart;
|
|
|
|
complete the transition of the NeoCart raw material manufacturing process to our in-house facilities and satisfy the United States Food and Drug Administration (the FDA) as to the comparability of such raw materials to
those manufactured by third parties to support the BLA filing for NeoCart;
|
|
|
|
secure additional funding as may be needed, including, without limitation, in order to complete our NeoCart Phase 3 clinical trial, and file a biologic license application (BLA) with the FDA;
|
|
|
|
obtain required regulatory approvals for the manufacturing and commercialization of NeoCart;
|
|
|
|
obtain adequate reimbursement from payors for NeoCart or any other product that may be commercialized, if approved;
|
|
|
|
manage our spending as costs and expenses increase due to clinical trials, regulatory approvals, manufacturing and commercialization;
|
|
|
|
continue to build and maintain a strong intellectual property portfolio;
|
|
|
|
recruit and retain qualified executive management and other personnel;
|
|
|
|
build and maintain appropriate research and development, clinical, sales, manufacturing, financial reporting, distribution and marketing capabilities on our own or through third parties;
|
|
|
|
expand potential indications of NeoCart and our cell therapy technology platform;
|
|
|
|
gain broad market acceptance for our product candidates; and
|
|
|
|
develop and maintain successful strategic relationships.
|
If we are unsuccessful in accomplishing any of these
objectives, we may not be able to develop product candidates, raise capital, expand our business or continue our operations.
Failure to obtain, or
any delay in obtaining, FDA approval regarding the comparability of critical NeoCart raw materials following our technology transfer and manufacturing location transition may have an adverse effect on our business, operating results and prospects.
We are in the process of completing a technology transfer to transition the manufacturing of certain raw materials and components in the NeoCart
supply chain from outsourced contract manufacturers to in-house manufacturing facilities. This technology transfer extends to our source collagen and collagen honeycomb scaffold, as well as the three components of the CT3 bioadhesivemethylated
collagen, curing component and activated polyethylene glycol.
We have also entered into a supply agreement with Collagen Solutions (UK) Limited (Collagen
Solutions) pursuant to which we may oversee the manufacture of additional collagen used in our manufacture of NeoCart. We currently do not anticipate using any collagen produced by Collagen Solutions in the near future, but anticipate needing
additional supplies of collagen above those we anticipate being able to produce in-house upon commercialization, if ever.
Although we do not anticipate
changes to the raw materials, formulations or properties, nor do we anticipate changes to the NeoCart manufacturing process or finished product specifications as a result of the transfer, we are required to demonstrate to the FDA that the raw
materials manufactured in our facility, and which may be manufactured under our direction in third party facilities (including, without limitation, facilities operated by Collagen Solutions) are comparable to the raw materials that were manufactured
in the previous contract manufacturers facilities. Demonstrating comparability requires evidence that the product is consistent with that produced for the clinical trial to assure that the technology transfer does not affect safety, identity,
purity or efficacy during the expansion from pilot scale to full scale production. For example, in April 2016, the FDA approved our submission which provided equivalence data for the collagen manufactured at our Lexington, Massachusetts facility,
meaning that the collagen manufactured at such facility will require no further additional data or actual patient equivalence studies. Similarly, in August 2016, the FDA notified us that it approved our collagen scaffold equivalence strategy, which
we previously submitted in May 2016.
In the future, the FDA may determine that such analytical data is not sufficient to prove comparability of the raw
materials produced at our in-house manufacturing sites, or the sites of third parties under our direction, to the raw materials sourced from external vendors for earlier clinical trial work, including the NeoCart Phase 3 clinical trial. If this is
the case, the FDA may require that we provide additional preclinical or clinical data to provide evidence to support the comparability of the raw materials. The size, scope, length and costs of any new or supplemental clinical trials that may be
required by the FDA to provide such data are not known at this time.
27
Failure or delay in obtaining FDA approval of the comparability of our NeoCart raw materials or the FDA requiring us to provide clinical data may result in delays to our current projected
timelines and could have an adverse effect on our business, operating results and prospects.
Additionally, our manufacturing sites, or those of third
party sites under our direction, may not receive FDA approval to operate at all, resulting in delays while we implement improvements necessary to receive approval which would lead to delays in the initiation of commercial production. In addition, we
could encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel, leading to additional delays.
We are heavily dependent on the success of our lead product candidate NeoCart, which is still under development in a Phase 3 clinical trial. If we are
unable to commercialize NeoCart in the future, or experience significant delays due to manufacturing or otherwise in doing so, our business will be materially harmed.
We have invested a significant portion of our time and financial resources in the development of NeoCart, our product candidate in clinical development. We
anticipate that in the near term our ability to generate revenues will depend solely on the successful development and commercialization of NeoCart. We may not complete our registration filings in our anticipated time frame. Even after we complete
our Biologics License Application (BLA) filing, the FDA may not accept our submission, may request additional information from us, including data from additional clinical trials, and, ultimately, may not grant marketing approval for NeoCart. In
addition, the clinical data we have generated to date is susceptible to varying interpretations and many companies that have believed that their products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA approval for
their products.
If we are not successful in commercializing NeoCart, or are significantly delayed in doing so, our business will be materially harmed and
we may need to curtail or cease operations. Our ability to successfully commercialize NeoCart will depend, among other things, on our ability to:
|
|
|
complete the data analysis for the NeoCart Phase 3 clinical trial and the BLA submission for NeoCart;
|
|
|
|
successfully monitor patients during and after treatment and minimize the risk that enrolled subjects will drop out of the NeoCart Phase 3 clinical trial before they are evaluated for the primary endpoint;
|
|
|
|
produce, through a validated process, NeoCart in quantities sufficiently large to permit successful commercialization;
|
|
|
|
receive marketing approvals from the FDA and similar foreign regulatory authorities;
|
|
|
|
obtain adequate reimbursement from payors for NeoCart, if approved;
|
|
|
|
build a commercial infrastructure and launch commercial sales of NeoCart;
|
|
|
|
maintain adequate capital resources to fund operations through commercialization; and
|
|
|
|
secure acceptance of NeoCart in the medical community and with third-party payors.
|
We have incurred
significant losses since our inception and anticipate that we will continue to incur substantial losses for the next several years.
We have
incurred net losses in each year since our inception, including net losses of $16.2 million in 2016 and $32.0 million in 2015. As of September 30, 2017 and December 31, 2016 we had an accumulated deficit of $201.4 million
and $181.8 million, respectively. We expect to continue to incur substantial losses for the next several years, and we expect these losses to increase as we continue our development of and seek regulatory approval for, NeoCart and our future
product candidates. In addition, if we receive regulatory approval to market NeoCart or any of our future product candidates, we will incur additional losses as we scale our manufacturing operations and build an internal sales and marketing
organization to commercialize any approved products. In addition, we expect our expenditures to increase as we add infrastructure and personnel to support our expanding operations in connection with the commercialization of NeoCart, if approved. We
anticipate that our net losses and accumulated deficit for the next several years will be significant as we conduct our planned operations. Given our current development plans, we anticipate that our existing cash and cash equivalents and marketable
securities will be not be sufficient to fund our operations beyond the middle of 2018. Accordingly, these factors, among others, raise substantial doubt about our ability to continue as a going concern. Because of the numerous risks and
uncertainties associated with the development of cell therapies, we are unable to accurately predict the timing or amount of the development and clinical expenses or when, or if we will be able to achieve, or maintain, profitability. In addition,
our expenses could increase if we are required by the FDA or comparable foreign regulatory authorities to perform preclinical or clinical studies or trials in addition to those currently expected, or if there are any delays in completing the
technology transfer and manufacturing location transition of our NeoCart raw material manufacturing process or completing our clinical trials or the development of NeoCart or our future product candidates. The amount of our future net losses will
depend, in part, on the amount and timing of our expenses, our
28
ability to generate revenue and our ability to raise additional capital. These net losses have had, and will continue to have, an adverse effect on our stockholders equity and working
capital.
We will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not available,
may require us to delay, reduce or cease our product development activities and operations.
We are currently advancing our lead product candidate
NeoCart through clinical development. Developing cell therapies, including conducting preclinical studies and clinical trials, is expensive. We will require substantial additional capital in order to file a BLA for NeoCart with the FDA, create
additional manufacturing capacity for and to commercialize NeoCart and conduct the research and development and clinical and regulatory activities necessary to bring other product candidates to market. If the FDA or comparable foreign regulatory
authorities require that we perform additional preclinical studies or clinical trials at any point or expand or extend our current trials, our expenses would further increase beyond what we currently expect, and the anticipated timing of any future
clinical development activities and potential regulatory approvals may be delayed depending upon our allocation of resources and available funding. Raising funds currently or in the then-current economic environment may be difficult and additional
funding may not be available on acceptable terms, or at all.
The global economic volatility and market instability has made the business climate more
volatile and more costly. These economic conditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessary debt or equity financing more difficult, more costly, and more
dilutive. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, or on acceptable terms, we may be required to delay, limit, reduce or
terminate preclinical studies, clinical trials or other development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be
necessary to commercialize our product candidates.
The amount and timing of our funding requirements will depend on many factors, including:
|
|
|
the timing of and costs involved in obtaining NeoCart regulatory approvals, including the submission of the BLA for NeoCart;
|
|
|
|
the scope, progress, expansion, costs and results of our clinical trials;
|
|
|
|
the scope, timing and costs of manufacturing NeoCart implants;
|
|
|
|
the timing of and costs associated with obtaining FDA approval of the comparability of the NeoCart raw materials manufactured in our facilities, or in third party facilities at our direction, with the raw materials that
were manufactured by third parties for the use in our NeoCart clinical trials;
|
|
|
|
market acceptance of NeoCart following the receipt of regulatory approval, if any;
|
|
|
|
our ability to obtain adequate reimbursement from payors for NeoCart or any other product that may be commercialized, if approved;
|
|
|
|
the resources we devote to marketing and commercializing NeoCart, if approved;
|
|
|
|
the scope, progress, expansion and costs of the commercial manufacturing of NeoCart;
|
|
|
|
the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities associated therewith; and
|
|
|
|
our need to implement additional internal systems and infrastructure, including financial and reporting systems, related to our status as a public company and the potential commercialization of NeoCart, if approved.
|
Many of these factors are outside of our control. Based upon our currently expected level of operating expenditures, we believe that we
will be able to fund our operations and sustain currently projected cash needs into the middle of 2018. Our expectations are based on managements current assumptions, regulatory submission timelines and clinical development plans, which may
prove to be wrong, and we could spend our available financial resources much faster than we currently expect. This period could be shortened if there are any unanticipated increases in spending on development programs or other unanticipated
increases in spending related to circumstances outside of our control, including, without limitation, costs associated with litigation or other legal proceedings, hiring of additional consultants and personnel or procurement of additional raw
materials. Our existing cash and cash equivalents will not be sufficient to complete a BLA filing for NeoCart or complete any clinical development of any future product candidates that would be necessary to support an application for regulatory
approval. Accordingly, we continue to require substantial additional capital. In order to fund our future needs, we may seek additional funding through equity or debt financings, development partnering arrangements, lines of credit or other sources.
29
Our fundraising efforts in the future to secure additional financing will divert our management from our
day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at
all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, reduce or discontinue the development or commercialization of one or more of our product candidates or curtail our
operations, which will have an adverse effect on our business, operating results and prospects.
NeoCart and our future product candidates are
subject to extensive regulation, compliance with which is costly and time consuming, may cause unanticipated delays or prevent the receipt of the approvals required to commercialize NeoCart and our future product candidates.
The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of NeoCart and
our future product candidates are subject to extensive regulation by the FDA in the United States and by comparable authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive
regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years, and can vary substantially based upon the type, complexity, and novelty of the products involved, as well as the target indications.
Approval policies or regulations may change and the FDA has substantial discretion in the tissue regeneration approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and
expense invested in clinical development of product candidates, regulatory approval is never guaranteed.
The FDA or comparable foreign regulatory
authorities can delay, limit or deny approval of a product candidate for many reasons, including:
|
|
|
such authorities may disagree with the design or implementation of our NeoCart Phase 3 clinical trial or any of our future development partners clinical trials;
|
|
|
|
we or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is safe and effective for any indication;
|
|
|
|
such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from the United States;
|
|
|
|
the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;
|
|
|
|
we or any of our future development partners may be unable to demonstrate that a product candidates clinical and other benefits outweigh its safety risks;
|
|
|
|
such authorities may disagree with our interpretation of data from preclinical studies or clinical trials or the use of results from studies that served as precursors to our current or future product candidates;
|
|
|
|
such authorities may find deficiencies in our manufacturing processes or facilities or those of third-party manufacturers with which we or any of our future development partners contract for clinical and commercial
supplies; or
|
|
|
|
the approval policies or regulations of such authorities may significantly change in a manner rendering our or any of our future development partners clinical data insufficient for approval.
|
With respect to foreign markets, approval procedures vary among countries and, in addition to the risks described above, can involve additional product
testing, administrative review periods, and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals or biologics may result in increased cautiousness by the FDA and comparable
foreign regulatory authorities in reviewing new tissue regeneration products based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to
obtain, applicable regulatory approvals would prevent us or any of our future development partners from commercializing our product candidates.
We
are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products.
The
process of manufacturing NeoCart is complex, highly regulated and subject to several risks, including:
|
|
|
The process of manufacturing NeoCart, including the use of autologous cells, is susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or surgeon or
laboratory technician error. Even minor deviations from normal manufacturing processes could result in lost NeoCart production runs, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our
products or in the manufacturing process or facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.
|
30
|
|
|
The manufacturing facilities in which NeoCart is made could be adversely affected by equipment failures, labor shortages, natural disasters, power failures and numerous other factors. For instance, in 2012, we
voluntarily suspended manufacturing operations and paused enrollment of the NeoCart Phase 3 clinical trial upon discovery of discrepancies in the testing procedures used to assess one of the raw materials utilized in the manufacture of NeoCart
implants and we could be required in the future to suspend manufacturing due to circumstances out of our control.
|
|
|
|
We and our contract manufacturers must comply with the current Good Manufacturing Practices (cGMP) regulations and guidelines promulgated by the FDA. We and our contract manufacturers may encounter difficulties in
achieving quality control and quality assurance and may experience shortages in qualified personnel. We and our contract manufacturers are subject to inspections by the FDA and comparable agencies in other jurisdictions to confirm compliance with
applicable regulatory requirements. Any failure to follow cGMP or other regulatory requirements or delay, interruption or other issues that arise in the manufacture, packaging, storage or shipping of our products as a result of a failure of our
facilities or operations, or the facilities or operations of third parties, to comply with regulatory requirements or pass any regulatory authority inspection could significantly impair our ability to develop and commercialize our products,
including leading to significant delays in the availability of products for our clinical studies or the termination or hold on a clinical study, or the delay or prevention of a filing or approval of marketing applications for our product candidates.
Significant noncompliance could also result in the imposition of sanctions, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals for our product candidates, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could damage our reputation. If we are not able to maintain regulatory compliance, we may not be permitted to market our
products or may be subject to product recalls, seizures, injunctions, or criminal prosecution.
|
|
|
|
Any adverse developments affecting manufacturing operations for our products may result in shipment delays, clinical enrollment delays, inventory shortages, lot failures, product withdrawals or recalls, or other
interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing
alternatives.
|
In order to manufacture NeoCart, we operate our own cGMP manufacturing facility in Waltham, Massachusetts for production of
NeoCart. In 2015, we completed a facility for our cGMP manufacturing in Lexington, Massachusetts which we plan to further build out to produce key NeoCart raw materials, including the CT3 components, source collagen and collagen scaffold. While we
own the manufacturing process, unforeseen issues or outside influences could impact potential supply. For example:
|
|
|
Our facility in Waltham may not meet FDA cGMP standards during the pre-approval inspection necessary for BLA approval, delaying BLA approval and resulting in added cost to mitigate issues identified during inspection.
|
|
|
|
Our Lexington, Massachusetts facility for production of key raw materials may not receive FDA approval to operate, resulting in delays while we implement improvements necessary to receive approval, leading to delays in
the initiation of commercial production. We met with the FDA in December 2014 to obtain preliminary feedback and general acceptance of our raw material transition strategy. In April 2016, the FDA approved our production of collagen and the use
of collagen in the NeoCart Phase 3 clinical trial and in August 2016, the FDA also approved our collagen scaffold equivalence strategy. Additionally, we have entered into a supply agreement with Collagen Solutions pursuant to which we will oversee
the manufacture of additional collagen used in our manufacture of NeoCart. Any raw materials manufactured or handled at facilities operated by Collagen Solutions will similarly need to be approved by the FDA for comparability, and the FDA may delay
approval of the new raw material source or require additional studies to show comparability. We are not currently using any collagen produced by Collagen Solutions, but anticipate needing additional supplies of collagen above those we anticipate
being able to produce in-house upon commercialization, if ever.
|
|
|
|
The raw material to be produced at our facilities may not be comparable to the raw materials sourced from external vendors for earlier clinical trial work, including the ongoing NeoCart Phase 3 clinical trial, according
to our current projected timelines, and the FDA may delay approval of the new raw material source or require additional studies to show comparability. Such delays may impact the timing of our BLA filing for NeoCart and FDA approval, if granted at
all.
|
|
|
|
We may not achieve our anticipated production throughput targets, resulting in lower than anticipated capacity, limiting supply of our products, lowering revenue and increasing costs. We may not hit our production cost
target for a variety of reasons including increased raw material cost, underestimate of labor requirements, underestimate of capital requirement and other facility, personnel or materials issues that we have not anticipated. Increased costs will
adversely impact gross margin achieved by our products.
|
|
|
|
We may not be able to fund on a timely basis future expansions of additional clean rooms and associated equipment and validations to support NeoCart production and to meet market demand, or the FDA may require
additional data that may delay our ability to supply anticipated market needs.
|
|
|
|
The FDA may not approve implementation of the multi-unit NeoCart reactor or approval may be delayed, which could result in capacity limitation and high unit costs, depending upon the length of the delay.
|
31
NeoCart or any future product candidate we or any of our future development partners advance into clinical
trials may cause unacceptable adverse events or have other properties that may delay or prevent its regulatory approval or limit its commercial potential.
Unacceptable adverse events caused by NeoCart or any of our future product candidates that we advance into clinical trials could cause us or regulatory
authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications and markets. This in turn could prevent us from completing
development or commercializing the affected product candidate and generating revenue from its sale.
We have not yet completed clinical testing of any of
our product candidates for the treatment of the indications for which we intend to seek approval, and we currently do not know the extent of adverse events, if any, that will be observed in individuals who receive any of our product candidates. If
any of our product candidates cause unacceptable adverse events in clinical trials, we may not be able to obtain regulatory approval or commercialize such product candidate.
The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate we or any of our future
development partners advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.
The development of cell therapies has inherent risk. We or any of our future development partners will be required to demonstrate through adequate and
well-controlled clinical trials that our product candidates are effective, with a favorable benefit-risk profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. The development of a cell
therapy is a long, expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials. In addition, success in early clinical trials does not mean that later
clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Furthermore, our future trials will need
to demonstrate sufficient safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising
results. In addition, only a small percentage of biologics under development result in the submission of a BLA to the FDA and even fewer are approved for commercialization.
Development of cell therapies is inherently expensive and risky and may not be understood by or accepted in the marketplace, which could adversely
affect our future value.
The clinical development, commercialization and marketing of cell therapies are at an early-stage, substantially
research-oriented, and financially speculative. To date, very few companies have been successful in their efforts to develop and commercialize cell therapies. In general, cell therapies may be susceptible to various risks, including undesirable and
unintended side effects, unintended immune system responses, inadequate therapeutic efficacy, potentially prohibitive costs or other characteristics that may prevent or limit their approval or commercial use. Furthermore, the number of people who
may use cell- or tissue-based therapies is difficult to forecast with accuracy. Our future success is dependent on the establishment of a large global market for cell therapies and our ability to capture a share of this market with NeoCart and our
future product candidates.
Our development efforts with our cell therapy technology platform are susceptible to the same risks of failure inherent in the
development and commercialization of product candidates based on new technologies. The novel nature of cell therapies creates significant challenges in the areas of product development and optimization, manufacturing, government regulation,
third-party reimbursement and market acceptance.
Even if we successfully develop and obtain regulatory approval for NeoCart and our future product
candidates, the market may not understand or accept them. NeoCart and our future product candidates represent novel treatments and are expected to compete with a number of surgical options and more conventional products and therapies manufactured
and marketed by others, including major pharmaceutical and biotechnology companies. The degree of market acceptance of any of our developed and potential product candidates will depend on a number of factors, including:
|
|
|
the clinical safety and effectiveness of NeoCart and our future product candidates and their perceived advantage over alternative treatment methods, if any;
|
|
|
|
the design of the trial protocol for our NeoCart Phase 3 clinical trial;
|
|
|
|
adverse events involving NeoCart and our future product candidates or the products or product candidates of others;
|
|
|
|
the performance of competitive products in the market; and
|
|
|
|
the cost of manufacturing our products, the selling price of our products, and the reimbursement policies of government and private third-party payors.
|
32
If the healthcare community does not accept NeoCart or our future product candidates for any of the foregoing
reasons, or for any other reason, it could affect our sales, having an adverse effect on our business, financial condition and results of operations.
We have a limited manufacturing capacity for NeoCart and our future product candidates, which could inhibit our revenues and the long-term growth
prospects of our business.
We currently produce materials for clinical trials, including production of NeoCart, at our existing manufacturing
facilities in Waltham, Massachusetts, which we have designed and operated to be compliant with FDA, cGMP and the current Good Tissue Practice as and if applicable, requirements. While we believe these facilities provide us with sufficient capacity
to meet our expected clinical demand and possibly our initial commercial launch demand, it is possible that the demand for products could exceed our existing manufacturing capacity. It will become necessary or desirable for us to expand our
manufacturing capabilities for our cell therapy technology platform in the future, which may require us to invest significant amounts of capital and to obtain regulatory approvals. We may not be able to fund future expansions of additional clean
rooms and associated equipment and validations to support NeoCart production, or the FDA may require additional data that may delay our ability to supply anticipated market needs. If we are unable to meet rising demand for products on a timely basis
or unable to maintain cGMP compliance standards, then it is likely that our clients and potential clients will elect to pursue alternative treatment options, which could materially and adversely affect the level of our revenues and our prospects for
growth.
Our expected capacity to manufacture NeoCart implants at launch, if approved, is limited by both space and equipment. For example, the current
tissue engineering processor (TEP) in our Waltham facility is resource dependent due to its single-unit capacity. We are developing plans to innovate and automate our manufacturing equipment and processes with a goal of providing adequate and timely
capacity to meet expected demand through the first two years of commercialization from our current facilities. The FDA may not, however, approve of the equipment modifications and automation plans or approval may be delayed which could result in
capacity limitation or high unit costs depending upon the length of the delay.
Components of cell therapies approved for commercial sale or used in
late-stage clinical trials must be manufactured in accordance with cGMP. In addition, the manufacturing process for cell therapies may be required to be modified from time to time in response to FDA requests. Manufacture of cell- or tissue-based
therapies is complex and subjects companies to significant regulatory burdens that may change over time. We may encounter difficulties in the production of our product candidates due to our limited manufacturing experience.
Insurance coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult
for us to sell our product candidates profitably.
Market acceptance and sales of NeoCart and our future product candidates will depend
significantly on the availability of adequate insurance coverage and reimbursement from third-party payors for any of our product candidates and may be affected by existing and future health care reform measures. Government authorities and
third-party payors, such as private health insurers and health maintenance organizations, decide which medical treatments they will pay for and establish reimbursement levels. Reimbursement by a third-party payor may depend upon a number of factors
including the third-party payors determination that use of a product candidate is:
|
|
|
a covered benefit under its health plan;
|
|
|
|
safe, effective and medically necessary;
|
|
|
|
appropriate for the specific patient;
|
|
|
|
neither experimental nor investigational.
|
Obtaining coverage and reimbursement approval for a product
candidate from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our product candidates to the payor. We may not
be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that
reimbursement amounts will not reduce the demand for, or the price of, NeoCart or our future product candidates. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize certain of our product
candidates profitably, or at all, even if approved. In the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to health care systems that could affect our ability to sell our product
candidates profitably. In particular, in 2003 the Medicare Modernization Act revised the payment methods for many product candidates under Medicare. This has resulted in lower rates of reimbursement. There have been numerous other federal and state
initiatives designed to reduce payment for products.
33
As a result of legislative proposals and the trend toward managed health care in the United States, third-party
payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new cell or tissue therapies. They may also refuse to provide coverage of approved product candidates for medical indications
other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly approved cell or tissue therapies, which in
turn will put pressure on the pricing of such products. We expect to experience pricing pressures in connection with the sale of our product candidates due to the trend toward managed health care, the increasing influence of health maintenance
organizations, and additional legislative proposals as well as country, regional, or local healthcare budget limitations.
In addition, reimbursement
agencies in foreign jurisdictions may be more conservative than those in the United States. Accordingly, in markets outside the United States, the reimbursement for our products may be more limited than in the United States and may be insufficient
to generate commercially reasonable revenues and profits.
Failure to obtain or maintain adequate reimbursement for any products for which we receive
marketing approval will adversely impact our ability to achieve commercial success.
We may pursue additional indications and conduct additional
clinical trials for NeoCart or other products we may develop in the future. If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
We are required to identify and enroll a sufficient number of patients that meet inclusion criteria under investigation for our clinical trials. There is a
limited patient population from which to draw participants in clinical trials. We may not be able to identify and enroll a sufficient number of patients, or those with required or desired characteristics and criteria, in a timely manner. In
addition, there are a limited number of specialized orthopedic surgeons that perform cartilage repair implantation procedures and among physicians who perform such procedures, some may not choose to perform these procedures under conditions that
fall within our protocols, which would have an adverse effect on our development of product candidates. For example, in November 2015 we changed our guidance for the completion of patient enrollment in the NeoCart Phase 3 clinical trial from June
2016 to June 2017 based on enrollment trends in November 2015 not meeting our expectations. We completed enrollment in the NeoCart Phase 3 clinical trial in June 2017.
Our ability to enroll patients in any future clinical trials is affected by a number of factors including:
|
|
|
the size and nature of the patient population;
|
|
|
|
the design of the trial protocol for our clinical trials;
|
|
|
|
the eligibility and exclusion criteria for the trial in question;
|
|
|
|
the availability of competing therapies and competing clinical trials, and physician and patient perception of our product candidates and our other product candidates being studied in relation to these other potential
options;
|
|
|
|
the efforts to facilitate timely enrollment in clinical trials;
|
|
|
|
the ability to obtain and maintain patient consent;
|
|
|
|
the number and location of clinical sites in our clinical trials;
|
|
|
|
the proximity and availability of clinical trial sites for prospective patients;
|
|
|
|
the availability of time and resources at the institutions where clinical trials are and will be conducted;
|
|
|
|
the availability of raw materials and the possibility of raw materials expiring prior to their use;
|
|
|
|
the availability of adequate financing to fund ongoing clinical trial expenses;
|
|
|
|
the presence of concomitant joint disease in patients under investigation; and
|
|
|
|
the study endpoints such as pain that rely on subjective patient reported outcomes.
|
If we have difficulty
enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have an adverse effect on our business.
A number of cell and tissue therapy companies have suffered significant setbacks or difficulty enrolling patients in later stage clinical trials even after
achieving promising results in earlier stages of development. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and initial results from a clinical trial do not necessarily
predict final results. Even if early stage clinical trials are successful, we may need to conduct additional clinical trials for product candidates in additional patient populations or under different treatment conditions before we are able to seek
approvals from the FDA and regulatory authorities outside the United States to market and sell these product candidates. Our failure to demonstrate the required
34
characteristics to support marketing approval for NeoCart and our product candidates in our current and future clinical trials would substantially harm our business and prospects.
If our competitors develop treatments for the target indications of NeoCart or our future product candidates that are approved more quickly, marketed
more successfully or demonstrated to be safer or more effective than our product candidates, our commercial opportunity will be reduced or eliminated.
The cell and tissue therapy sector is intensely competitive and subject to rapid and significant technological change. We face competition from major
multinational companies, established and early-stage biotechnology 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 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 companies may also invest heavily to accelerate discovery
and development of novel therapeutics or to in-license novel therapeutics 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 or FDA
approval or discovering, developing and commercializing treatments in the indications 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.
There are several clinical-stage development programs in various stages of development that seek to regenerate soft
tissue and repair cartilage. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, technologies and products that are more effective, including a one-step alternative to NeoCart, or less costly than NeoCart or any
future product candidates that we may develop, which could render our products obsolete and noncompetitive.
We believe that our ability to successfully
compete will depend on, among other things:
|
|
|
the results of our and our collaborative partners preclinical studies and clinical trials;
|
|
|
|
the relative prices and perceived value of competitive products as compared to NeoCart;
|
|
|
|
our ability to recruit and enroll patients for our clinical trials;
|
|
|
|
the relative efficacy, safety, ease of use, reliability and durability of our product candidates;
|
|
|
|
the speed at which we and our competitors develop our respective product candidates;
|
|
|
|
our ability to design and successfully execute appropriate clinical trials;
|
|
|
|
our ability to manufacture raw materials for use in our clinical trials, including our Phase 3 clinical trial of NeoCart;
|
|
|
|
our ability to protect and develop intellectual property rights related to our products;
|
|
|
|
our ability to maintain a good relationship with regulatory authorities;
|
|
|
|
the timing and scope of regulatory approvals, if any;
|
|
|
|
our ability to commercialize and market any of our product candidates that receive regulatory approval;
|
|
|
|
market perception and acceptance of cell or tissue therapies;
|
|
|
|
acceptance of our product candidates by physicians, patients and institutions;
|
|
|
|
the cost to manufacture and price of our products;
|
|
|
|
adequate levels of reimbursement under private and governmental health insurance plans, including Medicare; and
|
|
|
|
our ability to manufacture and sell commercial quantities of any approved products to the market.
|
If our
competitors market products that are more effective, safer or less expensive than our future products or that reach the market sooner than our future products, we may not achieve commercial success. In addition, poor market reception to the recently
launched MACI product by a competitor could negatively impact a future launch of NeoCart following FDA approval, if at all. Any inability to compete effectively will adversely impact our business and financial prospects.
If we are not successful in discovering, developing, acquiring and commercializing additional product candidates, our ability to expand our business
will be limited.
A substantial amount of our effort is focused on the continued clinical testing and potential approval of NeoCart and our future
product candidates and expanding our product candidates to serve other indications of high unmet medical needs. Research programs
35
to identify other indications require substantial technical, financial and human resources, whether or not any product candidates for other indications are ultimately identified. Our research
programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:
|
|
|
the research methodology used may not be successful in identifying potential product candidates;
|
|
|
|
competitors may develop alternatives that render our product candidates obsolete or less attractive;
|
|
|
|
product candidates we develop may nevertheless be covered by third parties patents or other exclusive rights;
|
|
|
|
a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
|
|
|
|
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and
|
|
|
|
a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors, if applicable.
|
If we do not successfully develop and commercialize product candidates for other indications, our business and future prospects may be limited and our
business will be more vulnerable to problems that we encounter in developing and commercializing our current product candidates.
We may fail to
comply with any of our obligations under existing agreements pursuant to which we license rights or technology, which could result in the loss of rights or technology that are material to our business.
We are a party to technology licenses that are important to our business and we may enter into additional licenses in the future. We currently hold material
licenses from Purpose Co., Ltd., Angiotech Pharmaceuticals (US), Inc., Angiodevice International GmbH, the Board of Trustees of The Leland Stanford Junior University, Koken Co., Ltd., Intrexon and Advanced BioMatrix, Inc. The rights licensed under
these agreements, including rights relating to our scaffolds, tissue processor, bioadhesives and growth factors, are material to our cell therapy technology platform and the continued development of NeoCart and our future product candidates. These
licenses impose various commercial, contingent payment, royalty, insurance, indemnification and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we would
lose valuable rights under our license agreements and our ability to develop or commercialize product candidates. Any termination or reversion of our rights to under the foregoing agreements may have a material adverse effect on our business,
prospects and results of operations. Our Exclusive Channel Collaboration Agreement (the ECC) with Intrexon Corporation (Intrexon) provides that Intrexon may terminate such agreement if we do not perform certain specified requirements, including
developing therapies considered demonstrably superior to existing therapies and those under development by us.
The technologies on which our
channel partnering agreement with Intrexon is based are currently in preclinical and clinical stages of development. The intellectual property of Intrexon underlying the ECC may be subject to infringement or other challenges, similar to those we
face, as set forth elsewhere in these risk factors.
Our ECC with Intrexon that provides for the worldwide exclusive use of Intrexons
proprietary synthetic biology technology platform for the development and commercialization of allogeneic genetically modified chondrocyte cell therapeutics for the treatment or repair of damaged articular hyaline cartilage in humans. Such
technologies have a limited history of use in the design and development of human therapeutic product candidates and may therefore involve unanticipated risks or delays. We cannot assure that any product candidates developed from this collaboration
will result in nonclinical results sufficient to warrant the advancement of such product candidates into human clinical trials.
To the extent the
intellectual property protection of any of the assets owned or licensed by Intrexon utilized under our ECC with Intrexon are successfully challenged or encounter problems, including, without limitation, restrictions on freedom to operate, with the
United States Patent and Trademark Office or other comparable agencies throughout the world, the future development or commercialization, if any, of these potential products could be delayed or prevented. Any challenge to the intellectual property
protection of intellectual property owned or licensed by Intrexon of a potential development asset arising from our ECC with Intrexon could harm our business have an adverse effect on our financial condition and results of operations.
We will incur additional expenses in connection with our exclusive channel collaboration arrangement with Intrexon.
Pursuant to our ECC with Intrexon, we are responsible for future research and development expenses of product candidates developed under each such
collaboration, the effect of which may increase the level of our overall research and development expenses going forward. We have incurred $3.0 million and $3.1 million for the years ended December 31, 2016 and 2015, respectively, in
connection with our collaboration with Intrexon. There were no expenses incurred under the collaboration for the nine months ended September 30, 2017. In addition, because development activities are determined pursuant to a joint steering
committee comprised of
36
representatives of Intrexon and us, future development costs associated this program may be difficult to anticipate and may exceed our expectations. Our actual cash requirements may vary
materially from our current expectations for a number of other factors that may include, but are not limited to, unanticipated technical challenges, changes in the focus and direction of our development activities or adjustments necessitated by
changes in the competitive landscape in which we operate. If we are unable to continue to financially support such collaborations due to our own working capital constraints, we may be forced to delay our activities.
We may experience delays in commencing or conducting our clinical trials or in receiving data from third parties or in the completion of clinical
testing, which could result in increased costs to us and delay our ability to generate product candidate revenue.
Before we can initiate clinical
trials in the United States for our product candidates, we need to submit the results of preclinical testing to the FDA as part of an IND application, along with other information including information about product candidate chemistry,
manufacturing and controls and our proposed clinical trial protocol. We may rely in part on preclinical, clinical and quality data generated by contract research organization and other third parties for regulatory submissions for our product
candidates. If these third parties do not make timely regulatory submissions for our product candidates, it will delay our plans for our clinical trials. If those third parties do not make this data available to us, we will likely have to develop
all necessary preclinical and clinical data on our own, which will lead to significant delays and increase development costs of the product candidate. In addition, the FDA may require us to conduct additional preclinical testing for any product
candidate before it allows us to initiate clinical testing under any IND application, which may lead to additional delays and increase the costs of our preclinical development. Despite the presence of an active IND application for a product
candidate, clinical trials can be delayed for a variety of reasons including delays in:
|
|
|
identifying, recruiting and training suitable clinical investigators;
|
|
|
|
reaching agreement on acceptable terms with prospective contract research organizations and trial sites, the terms of which can be subject to extensive negotiation, may be subject to modification from time to time, and
may vary significantly among different contract research organizations and trial sites;
|
|
|
|
manufacturing and obtaining sufficient quantities of a product candidate for use in clinical trials, including as a result of transferring the manufacturing of a product candidate to another site or manufacturer or the
procurement of critical raw materials required for manufacturing a product candidate;
|
|
|
|
obtaining and maintaining institutional review board or ethics committee approval to conduct a clinical trial at an existing or prospective site;
|
|
|
|
identifying, recruiting and enrolling subjects to participate in a clinical trial; and
|
|
|
|
retaining or replacing participants who have initiated a clinical trial but may withdraw due to adverse events from the therapy, insufficient efficacy, fatigue with the clinical trial process, or personal issues.
|
The FDA may also put a clinical trial on clinical hold at any time during product candidate development. In addition, we may voluntarily
pause a clinical trial for a variety of reasons. For instance, in 2012 we voluntarily suspended manufacturing operations and paused enrollment of the NeoCart Phase 3 clinical trial upon discovery of discrepancies in the testing procedures used to
assess one of the raw materials utilized in the manufacture of NeoCart implants and we could be required in the future to suspend manufacturing due to circumstances out of our control.
Once a clinical trial has begun, it may also be delayed as a result of ambiguous or negative interim results. Further, a clinical trial may be suspended or
terminated by us, an institutional review board, an ethics committee or a data safety monitoring committee overseeing the clinical trial, any of our clinical trial sites with respect to that site or the FDA or other regulatory authorities due to a
number of factors, including:
|
|
|
failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
|
|
|
|
inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities;
|
|
|
|
unforeseen safety issues, known safety issues that occur at a greater frequency or severity than we anticipate, or any determination that the clinical trial presents unacceptable health risks; or
|
|
|
|
lack of adequate funding to continue the clinical trial.
|
Any delays in the commencement of our clinical
trials will delay our ability to pursue regulatory approval for our product candidates. Changes in U.S. and foreign regulatory requirements and guidance also may occur and we may need to amend clinical trial protocols to reflect these changes.
Amendments may require us to resubmit our clinical trial protocols to institutional review boards for re-examination, which may affect the costs, timing and likelihood of a successful completion of a clinical trial. If we or any of our future
development partners experience delays in the completion of, or if we or any of our future development partners must terminate, any clinical trial of any product candidate our ability to obtain regulatory approval for that product candidate will be
delayed and the
37
commercial prospects, if any, for the product candidate may suffer as a result. In addition, many of these factors may also ultimately lead to the denial of regulatory approval of a product
candidate.
Regulatory authorities, including the FDA, PMDA and the European Medicines Agency, may disagree with our interpretations of data from
pre-clinical studies and clinical trials. Regulatory authorities also may approve a product for narrower indications than requested or may grant approval subject to the performance of post-marketing studies for a product. There can be no guarantee
that such post-approval studies, if required, will corroborate the results of earlier trials. Furthermore, the market use of such products may show different safety and efficacy profiles to those demonstrated in the trials on which marketing
approval was based. Such circumstances could lead to the withdrawal or suspension of marketing approval for the product, which could have a material adverse effect on our business, financial condition, operating results or cash flows. In addition,
regulatory authorities may not approve or agree with the labeling claims that are necessary or desirable for the successful commercialization of our products.
If NeoCart or any future product candidate that we successfully develop does not achieve broad market acceptance among physicians, patients, healthcare
payors and the medical community, the revenue that it generates and the success of our operations may be limited.
Even if NeoCart or our future
product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Coverage and reimbursement of our product candidates by third-party payors, including
government payors, generally is also necessary for commercial success. The degree of market acceptance of any approved product candidates will depend on a number of factors, including:
|
|
|
the efficacy and safety as demonstrated in clinical trials;
|
|
|
|
the clinical indications for which our product candidate is approved;
|
|
|
|
acceptance by physicians, major operators of hospitals and clinics and patients of our product candidate as a safe and effective treatment;
|
|
|
|
the number of alternative treatments on the market and the potential and perceived advantages of our product candidates over such alternative treatments;
|
|
|
|
the safety of product candidates seen in a broader patient group, including their use outside the approved indications;
|
|
|
|
the cost of treatment in relation to alternative treatments;
|
|
|
|
the availability of adequate reimbursement and pricing by third parties and government authorities;
|
|
|
|
relative convenience and ease of administration;
|
|
|
|
the prevalence and severity of adverse events;
|
|
|
|
the effectiveness of our sales and marketing efforts; and
|
|
|
|
unfavorable publicity relating to the product candidate or cell or tissue therapies, in general.
|
If any
product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors and patients, we may not generate sufficient revenue from that product candidate and may not become or remain profitable.
Ethical, social and legal concerns about cell or tissue therapies could result in additional regulations restricting or prohibiting the use of our product candidates.
Additionally, if any of our competitors products are approved and are unable to gain market acceptance for any reason, there could be a market
perception that products like NeoCart are not able to adequately meet an unmet medical need. If we are unable to demonstrate to physicians, hospitals, healthcare payors and patients that our products are better alternatives, we may not be able to
gain market acceptance for our products at the levels we anticipate and our business may be materially harmed as a result.
We may face product
liability claims and, if successful claims are brought against us, we may incur substantial liability and costs. If the use of our product candidates harms patients, or is perceived to harm patients even when such harm is unrelated to our product
candidates, our regulatory approvals could be revoked or otherwise negatively impacted and we could be subject to costly and damaging product liability claims.
The use of NeoCart and our future product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the
risk of product liability claims. Product liability claims might be brought against us by participants in clinical trials, consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our product
candidates and any products for which we obtain marketing approval. There is a risk that our product candidates may induce adverse events, and that such adverse events may not be detected for a long period of time. If we cannot successfully defend
against
38
product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:
|
|
|
impairment of our business reputation;
|
|
|
|
withdrawal of clinical trial participants;
|
|
|
|
termination of clinical trial sites or entire trial programs;
|
|
|
|
increased costs due to related litigation;
|
|
|
|
distraction of managements attention from our primary business;
|
|
|
|
substantial monetary awards to patients or other claimants;
|
|
|
|
the inability to commercialize our product candidates; and
|
|
|
|
decreased demand for our product candidates, if approved for commercial sale.
|
We carry product liability
insurance that we believe is sufficient in light of our current clinical programs; however, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we
obtain marketing approval for product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate
amounts. On occasion, large judgments have been awarded in class action lawsuits based on cell or tissue therapies or medical treatments that had unanticipated adverse effects. In addition, under some of our agreements with clinical trial sites, we
are required to indemnify the sites and their personnel against product liability and other claims. A successful product liability claim or series of claims brought against us or any third parties whom we are required to indemnify could cause our
stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.
During the course
of treatment, patients may suffer adverse events for reasons that may be related to our product candidates. Such events could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively
impact or end our opportunity to receive or maintain regulatory approval to market our products, or require us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not believe that an adverse event is related to
our products, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt our development and commercialization efforts, delay our regulatory approval process, or impact and limit the type of
regulatory approvals our product candidates receive or maintain. As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial condition or results of
operations.
We do not carry insurance for all categories of risk that our business may encounter and we may not 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.
If we are unable to establish sales and marketing capabilities or fail to enter into agreements with third parties to market and sell any product
candidates we may successfully develop, we may not be able to effectively market and sell any such product candidates.
We have no experience
selling and marketing any products. We do not currently have any infrastructure for the sale, marketing and distribution of any of our product candidates once approved, if at all, and we must build this infrastructure in order to commercialize any
product candidates for which we may obtain approval in the United States or make arrangements with third parties to perform these functions for us outside of the United States. To successfully commercialize any products that may result from our
development programs, we will need to develop these capabilities, either on our own or with others. The establishment and development of a sales force, either by us or jointly with a development partner, or the establishment of a contract sales
force to market any product candidates we may develop will be expensive and time consuming and could delay any commercial launch. If we or any of our future development partners are unable to establish sales and marketing capabilities or any other
nontechnical capabilities necessary to commercialize any product candidates we may successfully develop, we will need to contract with third parties to market and sell such product candidates. We may not be able to establish arrangements with third
parties on acceptable terms, if at all.
Significant developments arising from the current political climate in the United States and U.K. could
have a material adverse effect on us.
In January 2017, a new presidential administration and Congress took power in the United States. The
president has expressed antipathy towards existing trade agreements, like the North American Free Trade Agreement, greater restrictions on free trade generally and significant increases on tariffs on goods imported into the United States,
particularly from China and Mexico. Changes in United States social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing,
39
development and investment, and any negative sentiments towards the United States as a result of such changes, could adversely affect our business.
There have been recent public announcements by members of the U.S. Congress and the current presidential administration regarding their plans to repeal and
replace the Affordable Care Act (the ACA), but they have been unsuccessful in doing so as of the date of the filing of this report. We cannot predict the ultimate form or timing of any repeal or replacement of the ACA or the effect such repeal or
replacement would have on our business. Regardless of the impact of repeal or replacement of the ACA on us, the government has shown significant interest in pursuing healthcare reform and reducing healthcare costs.
On June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union. On February 1, 2017, the United Kingdom
parliament voted to allow the United Kingdom to exit the European Union by passing a bill that gives the prime minister of the United Kingdom the authority to invoke Article 50 of the Lisbon Treaty. This referendum has created political and economic
uncertainty, particularly in the United Kingdom and the European Union, and this uncertainty may last for years. There are many ways in which our business could be affected, only some of which we can identify.
The referendum, and the likely withdrawal of the United Kingdom from the European it triggers, has caused and, along with events that could occur in the
future as a consequence of the United Kingdoms withdrawal, including the possible breakup of the United Kingdom, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This
volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements
between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. These possible negative impacts, and others resulting from the United
Kingdoms actual or threatened withdrawal from the European Union, may adversely affect our operating results and growth prospects.
Changes in
government funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, properly administer drug innovation, or prevent new products and services from being developed or
commercialized by our life science tenants, which could negatively impact our business.
The ability of the FDA to review and approve new products
can be affected by a variety of factors, including budget and funding levels, ability to hire and retain key personnel, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In
addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
In December 2016, the 21
st
Century Cures Act was signed into law. This new legislation is designed to
advance medical innovation and empower the FDA with the authority to directly hire positions related to drug and device development and review. In the past, the FDA was often unable to offer key leadership candidates (including scientists)
competitive compensation packages as compared to those offered by private industry. The 21
st
Century Cures Act is designed to streamline the agencys hiring process and enable the FDA to
compete for leadership talent by expanding the narrow ranges that are provided in the existing compensation structures.
In the first week of the new
presidential administration, it issued executive orders to freeze government hiring of new employees with the exception of military, national security and public safety personnel. This hiring freeze could impede current or future operations at the
FDA and other agencies. It is unknown at this time what the impact of the hiring freeze will have on the FDA and on programs such as the 21
st
Century Cures Act. Furthermore, future government
proposals to reduce or eliminate budgetary deficits may include reduced allocations to the FDA and other related government agencies. These budgetary pressures may result in a reduced ability by the FDA to perform their respective roles; including
the related impact to academic institutions and research laboratories whose funding is fully or partially dependent on both the level and timing of funding from government sources.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs, biologics and devices to be reviewed and/or approved by necessary
government agencies and the healthcare and drug industries ability to deliver new products to the market in a timely manner, which would adversely affect our tenants operating results and business. Interruptions to the function of the
FDA and other government agencies could adversely affect the demand for office/laboratory space and significantly impact our operating results and our business.
Legislative or regulatory healthcare reforms in the United States and abroad may make it more difficult and costly for us to obtain regulatory approval
of our product candidates and to produce, market and distribute our products after approval is obtained.
From time to time, legislation is drafted
and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often
revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of
40
NeoCart or any future product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have
on our business in the future. Such changes could, among other things, require:
|
|
|
changes to manufacturing methods;
|
|
|
|
additional studies, including clinical studies;
|
|
|
|
recall, replacement, or discontinuance of one or more of our products;
|
|
|
|
the payment of additional taxes; or
|
|
|
|
additional record keeping.
|
Each of these requirements would likely entail substantial time and cost and could
adversely harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory approvals for any future products would harm our business, financial condition and results of operations. We intend to seek
approval to market our product candidates in both the United States and in foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to such product
candidate. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
We currently rely on third parties in order to perform certain aspects of our business, including to support certain aspects of our clinical trials and
to supply the NeoCart tissue engineering processor. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product
candidates and our business could be substantially harmed.
We have relied upon and plan to continue to rely upon third parties to monitor and
manage data for our ongoing clinical programs. We rely on these parties for execution of our clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted
in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We also rely on third parties to assist in conducting our
nonclinical studies in accordance with good laboratory practices. We and our third-party service providers are required to comply with good clinical practices, which are regulations and guidelines enforced by the FDA, as well as comparable foreign
regulations and guidelines, for all of our product candidates in clinical development. Regulatory authorities enforce these good clinical practices through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any
of our third-party service providers or clinical trial sites fail to comply with applicable good clinical practices, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities
may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials
comply with good clinical practices requirements. In addition, our clinical trials must be conducted with product produced under applicable good manufacturing practices requirements. Failure to comply with these regulations may require us to repeat
nonclinical and clinical trials, which would delay the regulatory approval process.
Our third-party service providers are not our employees, and except
for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our on-going clinical and nonclinical programs. If third-party service providers do not
successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements
or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial
prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.
Because we have
relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves 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 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. We currently have a small number of
employees, which limits the internal resources we have available to identify and monitor our third-party service providers. To the extent we are unable to identify and successfully manage the performance of third-party service providers in the
future, our business may be adversely affected. Although we carefully manage our relationships with our third-party service providers, there can be no assurance that we will not encounter similar challenges or delays in the future or that these
delays or challenges will not have a material adverse impact on our business, financial condition and prospects.
We are also dependent on third-party
suppliers, most of which are sole source suppliers of the components used to manufacture our TEP. If these third-party suppliers do not supply sufficient quantities to us on a timely basis and in accordance with applicable
41
specifications and other regulatory requirements, there could be a significant interruption of our ability to supply, which would adversely affect clinical development or commercial production of
the product candidate. Furthermore, if any of these third parties cannot successfully supply TEPs that we require for our production that conforms to our specifications and with regulatory requirements, we will not be able to meet demand, for our
product candidates.
We do not expect to have the resources or capacity to commercially manufacture TEPs required to manufacture our proposed product
candidates if approved, and will likely continue to be dependent on third-party suppliers. Our dependence on third parties to manufacture and supply us with these TEPs may adversely affect our ability to develop and commercialize our product
candidates on a timely basis.
We have also entered into a supply agreement with Collagen Solutions pursuant to which we may oversee the manufacture of
additional collagen used in our manufacture of NeoCart. We currently do not anticipate using any collagen produced by Collagen Solutions during our Phase 3 clinical trial, but anticipate needing additional supplies of collagen above those we
anticipate being able to produce in-house upon commercialization, if ever.
We may not be successful in establishing and maintaining development or
other strategic partnerships, which could adversely affect our ability to develop and commercialize product candidates.
As part of our strategy,
we intend to enter into development or other strategic partnerships in the future, including collaborations with major biotechnology or pharmaceutical companies. We face significant competition in seeking appropriate partners and the negotiation
process is time consuming and complex. Moreover, we may not be successful in our efforts to establish a development partnership or other alternative arrangements for any of our other existing or future product candidates and programs because our
research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of development for collaborative effort or third parties may not view our product candidates and programs as having
the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establish development partnerships, the terms that we agree upon may not be favorable to us and we may not be able to maintain such development
partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved product candidate are disappointing. Any delay in entering into development partnership agreements related to our product candidates
could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach the market.
Moreover, if we
fail to establish and maintain development or other strategic partnerships related to our product candidates:
|
|
|
the development of certain of our current or future product candidates may be terminated or delayed;
|
|
|
|
our cash expenditures related to development of certain of our current or future product candidates would increase significantly and we may need to seek additional financing;
|
|
|
|
we may be required to hire additional employees or otherwise develop expertise, such as sales and marketing expertise, for which we have not budgeted; and
|
|
|
|
we will bear all of the risk related to the development of any such product candidates.
|
We will need to
expand our operations and increase the size of our company and we may experience difficulties in managing any such growth.
As we continue to
advance NeoCart towards potential commercialization, increase the number of ongoing product development programs and advance our future product candidates through preclinical studies and clinical trials, we will need to expand our development,
regulatory, manufacturing, marketing and sales capabilities and, in some cases, collaborate and contract with third parties to provide these capabilities for us. Our management, personnel and systems currently in place may not be adequate to support
this future growth. Our need to effectively manage our operations, growth and various projects requires that we:
|
|
|
successfully attract and recruit new employees or consultants with the requisite expertise and experience;
|
|
|
|
manage our preclinical and clinical programs effectively;
|
|
|
|
develop a marketing and sales infrastructure if we receive regulatory approval for any product candidate;
|
|
|
|
continue to improve our operational, financial and management controls, reporting systems and procedures, including those related to being a public company; and
|
|
|
|
construct, validate and effectively operate new and expanded manufacturing facilities.
|
If we are unable to
successfully manage this growth and increased complexity of operations, our business may be adversely affected.
42
If we fail to attract and keep senior management and key scientific personnel, the future development and
commercialization of our product candidates may suffer, harming future regulatory approvals, sales of our product candidates or our results of operations.
We are highly dependent on members of our management and scientific teams, including Adam Gridley, our Chief Executive Officer and President; Donald Haut,
Ph.D., our Chief Business Officer; Stephen Kennedy, our Chief Operating Officer; and Jonathan Lieber, our Chief Financial Officer. The loss of the services of any of these persons could impede the achievement of our research, development and
commercialization objectives. We do not maintain key person insurance for any of our executives or other employees.
Recruiting and retaining
qualified scientific, clinical, manufacturing, sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and
biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and
clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with
other entities that may limit their availability to us.
We may not be able to manage our business effectively if we are unable to attract and
retain key personnel and consultants.
Given the specialized nature of cell and tissue therapy and that it is a relatively new field, there is an
inherent scarcity of experienced personnel in the field. We may not be able to attract or retain qualified management (including a new chief executive officer), finance, scientific and clinical personnel and consultants 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 objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our industry has experienced high turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization
and business development expertise of our senior management team. The loss of Mr. Gridley or one or more additional executive officers or key employees, could seriously harm our ability to implement our business strategy successfully. While we
have entered into employment contracts with each of our executive officers, any of them could leave our employment at any time, as all of our employees are at-will employees. Replacing key personnel 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. Our failure to retain key personnel or consultants could materially harm our business, and the transition to any replacement personnel, particularly at the chief executive officer position, may cause or result in:
|
|
|
speculation and uncertainty about our business and future direction;
|
|
|
|
distraction of our employees and management;
|
|
|
|
difficulty in recruiting, hiring, motivating and retaining talented and skilled personnel;
|
|
|
|
volatility in our stock price; and
|
|
|
|
difficulty in negotiating, maintaining or consummating business or strategic relationships or transactions.
|
We rely on our scientific and clinical advisors and consultants to assist us in formulating our research, development and clinical strategies. These advisors
and consultants are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, these advisors and consultants typically 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. Furthermore, our advisors may have arrangements with other companies to assist them in
developing products or technologies that may compete with ours. If we are unable to maintain consulting relationships with our key advisors or consultants or if they provide services to our competitors, our development and commercialization efforts
will be impaired, and our business will be significantly harmed.
Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal control
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 and the related rules and regulations of the SEC, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the
Sarbanes-Oxley Act include establishing 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.
43
Pursuant to Section 404 of the Sarbanes-Oxley Act and related rules, our management will be required to
report upon the effectiveness of our internal control over financial reporting when we are no longer a smaller reporting company or an emerging growth company, each as defined under the Exchange Act. When and if we are a
large accelerated filer or an accelerated filer and are no longer an emerging growth company, each as defined in the Exchange Act, our independent registered public accounting firm will be required to attest to
the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public
companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 for a period of no more than five years. Once we are no longer an emerging growth company or, if
prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal control over financial
reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the
requirements of being a reporting company under the Exchange Act, we need to: upgrade our systems, including information technology; implement additional financial and management controls, reporting systems and procedures; and hire additional
accounting and finance staff.
We are also subject to complex tax laws, regulations, accounting principles and interpretations thereof. The preparation of
our financial statements requires us to interpret accounting principles and guidance and make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our interpretations, estimates and judgments are based on our historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for the preparation of our financial statements. U.S. generally accepted accounting principles presentation is subject to interpretation by the SEC, the Financial Accounting
Standards Board and various other bodies formed to interpret and create appropriate accounting principles and guidance. In the event that one of these bodies disagrees with our accounting recognition, measurement or disclosure or any of our
accounting interpretations, estimates or assumptions, it may have a significant effect on our reported results and may retroactively affect previously reported results. The need to restate our financial results could, among other potential adverse
effects, result in us incurring substantial costs, affect our ability to timely file our periodic reports until such restatement is completed, divert the attention of our management and employees from managing our business, result in material
changes to our historical and future financial results, result in investors losing confidence in our operating results, subject us to securities class action litigation, and cause our stock price to decline.
We may identify material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our
financial statements.
Our management team is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting
principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will
not be prevented or detected on a timely basis.
We cannot assure you that we will not have material weaknesses or significant deficiencies in our
internal control over financial reporting. If we identify any material weaknesses or significant deficiencies that may exist, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with
securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, and our stock price may decline materially as a result.
If we engage in an 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 acquiring businesses, technologies or products or entering into a business combination with another company.
For instance, in 2011, we acquired ProChon Biotech Ltd. Although we intend to evaluate and consider 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. Any acquisitions we undertake, including our prior acquisition of ProChon Biotech Ltd., will likely be
accompanied by business risks which may include:
|
|
|
the effect of the acquisition on our financial and strategic position and reputation;
|
|
|
|
the need to reprioritize our development programs and even cease development and commercialization of our product candidates;
|
|
|
|
the failure of an acquisition to result in expected benefits, which may include benefits relating to enhanced revenues, technology, human resources, costs savings, operating efficiencies, goodwill and other synergies;
|
44
|
|
|
the difficulty, cost and management effort required to integrate the acquired businesses, including costs and delays in implementing common systems and procedures and costs and delays caused by communication
difficulties;
|
|
|
|
the assumption of certain known or unknown liabilities of the acquired business, including litigation-related liabilities;
|
|
|
|
the reduction of our cash available for operations and other uses, the increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of
debt;
|
|
|
|
a lack of experience in new markets, new business culture, products or technologies or an initial dependence on unfamiliar distribution partners;
|
|
|
|
the possibility that we will pay more than the value we derive from the acquisition;
|
|
|
|
the impairment of relationships with customers, partners or suppliers of the acquired business; and
|
|
|
|
the potential loss of key employees of the acquired company.
|
These factors could harm our business, results
of operations or financial condition.
In addition to the risks commonly encountered in the acquisition of a business or assets as described above, we may
also experience risks relating to the challenges and costs of evaluating or closing a transaction, including distraction of our management team from normal business operations. The risks described above may be exacerbated as a result of managing
multiple acquisitions at once.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial losses during our history and do not expect to become profitable in the foreseeable future and may never achieve
profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. We may be unable to use these losses to offset income before such
unused losses expire. Under Sections 382 and 383 of the Internal Revenue Code (Code), utilization of net operating losses and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership
change limitations that have occurred or that could occur in the future. In general, an ownership change as defined by Section 382 of the Code results from a transaction or series of transactions over a three year period resulting
in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. We have in the past experienced ownership changes that have resulted in limitations on the use of a portion of our net operating
loss carryforwards. We have completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation. The results of this study indicated we experienced ownership changes, as
defined by Section 382 of the Code, in each of 2006, 2011, 2012, 2013 and 2016. If we experience further ownership changes, our ability to utilize our net operating loss carryforwards could be further limited.
Our internal computer systems, or those of our development partners, third-party clinical research organizations or other contractors or consultants,
may fail or suffer security breaches, which could result in a material disruption of our product development programs.
Despite the implementation
of security measures, our internal computer systems and those of our development partners, third-party clinical research organizations and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural
disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could
result in a material disruption of our programs. For example, the loss of clinical trial data for any of our product candidates 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 results in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or
proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.
We use hazardous
chemicals and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly. We may incur significant costs complying with environmental laws and
regulations.
Our research and development and manufacturing processes involve the controlled use of hazardous materials, including chemicals and
biological materials. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. We may be sued for any injury or contamination that results
from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these
hazardous materials and specified waste products, as well as the discharge of pollutants into the environment and human health and safety matters.
45
Compliance with environmental laws and regulations may be expensive and may impair our research, development and
production efforts. If we fail to comply with these requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs or capital expenditures for control equipment or operational changes necessary to
achieve and maintain compliance. In addition, we cannot predict the impact on our business of new or amended environmental laws or regulations or any changes in the way existing and future laws and regulations are interpreted and enforced.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider
trading.
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 or foreign regulators, failure to provide accurate information to regulatory authorities, failure to comply with manufacturing standards we have established, failure to comply with federal and state health care fraud
and abuse laws and regulations in the United States and abroad, failure to report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare
industry are subject to extensive laws and regulations 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 cause harm to our reputation. We have adopted a code of business conduct and ethics, 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.
In addition, during the course of our operations our directors, executives and employees may have access to material, nonpublic information regarding our
business, our results of operations or potential transactions we are considering. We may not be able to prevent a director, executive or employee from trading in our common stock on the basis of, or while having access to, material, nonpublic
information. If a director, executive or employee was to be investigated or an action was to be brought against a director, executive or employee for insider trading, it could have a negative impact on our reputation and our stock price. Such a
claim, with or without merit, could also result in substantial expenditures of time and money and divert attention of our management team from other tasks important to the success of our business.
Costs associated with being a public reporting company are significant, and public reporting requirements divert significant company resources and
management attention.
We are subject to the reporting requirements of the Exchange Act and the other rules and regulations of the SEC. We are
working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public reporting company
including preparing for the commercialization of NeoCart, if approved. These areas include corporate governance, corporate control, disclosure controls and procedures, and financial reporting and accounting systems. We have made, and will continue
to make, changes in these and other areas. Compliance with the various reporting and other requirements applicable to public reporting companies will require considerable time, attention of management and financial resources. In addition, the
changes we make may not be sufficient to allow us to satisfy our obligations as a public reporting company on a timely basis.
Further, the listing
requirements of NASDAQ require that we satisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of
interest and a code of conduct. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, the reporting requirements, rules and regulations will increase
our legal and financial compliance costs and will make some activities more time-consuming and costly. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public
company, could also make it more difficult for us to attract and retain qualified persons to serve as our directors or executive officers, or to obtain certain types of insurance, including directors and officers insurance, on acceptable
terms.
Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by
manmade problems such as terrorism. If any of our manufacturing, processing or storage facilities are damaged or destroyed, our business and prospects would be adversely affected.
A significant natural disaster, such as an earthquake, fire or flood, or a significant power outage, could have a material adverse impact on our business,
operating results and financial condition. If any of our manufacturing, processing or storage facilities, or any of the equipment in such facilities were to be damaged or destroyed, this would force us to delay or halt our clinical trial or
commercial
46
production processes. We currently produce materials for our clinical trials at our manufacturing facilities located in Waltham, Massachusetts. If these facilities or the equipment in them are
significantly damaged or destroyed, we may not be able to quickly or inexpensively replace our manufacturing capacity. In addition, natural disasters could affect our third-party service providers and manufacturers ability to perform services
and provide materials for us on a timely basis. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for, and to commercialize, our product candidates
may be delayed or prevented. For example, if a central laboratory holding all of our clinical product supply were to suffer a catastrophic loss of their facility, we would be required to delay our clinical trials. In addition, acts of terrorism
could cause disruptions in our business or the business of our third-party service providers, partners, customers or the economy as a whole.
Our
loan and security agreement contains operating covenants and restrictions that may restrict our business and financing activities.
We are party to
a loan and security agreement with Silicon Valley Bank, which provides for a line of credit of up to $1.75 million in the aggregate to finance certain equipment purchases. Borrowings under this agreement are secured by a first priority lien
over all equipment purchased using the line of credit. This agreement restricts our ability to, among other things:
|
|
|
engage in any business other than our current business;
|
|
|
|
merge or consolidate with other entities;
|
|
|
|
incur additional indebtedness;
|
|
|
|
create liens on our assets;
|
|
|
|
pay or declare dividends, or, in certain cases, repurchase our stock;
|
|
|
|
enter into transactions with affiliates; or
|
|
|
|
make any payment on subordinated indebtedness.
|
The operating covenants and restrictions in the loan and
security agreement, as well as covenants and restrictions in any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies.
Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants could result in a default under the loan and security agreement or any future
financing agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable and terminate all commitments to extend further credit.
We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will ever generate cash flow from operations at levels
sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments,
or if we fail to comply with the various requirements of our loan and security agreement with Silicon Valley Bank, or any indebtedness which we may incur in the future, we would be in default under our agreement with Silicon Valley Bank or other
indebtedness we may incur in the future. Any default under our agreement with Silicon Valley Bank, or any indebtedness that we may incur in the future, could have a material adverse effect on our business, results of operations and financial
condition.
We are increasingly dependent on information technology systems, infrastructure and data.
We are increasingly dependent upon information technology systems, infrastructure and data. Our computer systems may be vulnerable to service interruption or
destruction, malicious intrusion and random attack. Security breaches pose a risk that sensitive data, including intellectual property, clinical data, trade secrets or personal information may be exposed to unauthorized persons or to the public.
Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, denial-of service, social engineering and other means to
affect service reliability and threaten data confidentiality, integrity and availability. Our key business partners face similar risks, and a security breach of their systems could adversely affect our security posture. While we continue to invest
data protection and information technology, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems, that could adversely affect our business and operations and/or result in the loss of
critical or sensitive information, which could result in financial, legal, business or reputational harm.
47
Risks Related to Regulatory Approval
If we fail to complete clinical trials and obtain regulatory approval for NeoCart, our business would be significantly harmed.
We have not completed clinical development for any of our product candidates and will only obtain regulatory approval to commercialize a product candidate if
we can demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities in well-designed and conducted clinical trials that the product candidate is safe, effective, and otherwise meets the appropriate standards required for
approval for a particular class of products or indication. Clinical trials are lengthy, complex and extremely expensive processes with uncertain results. A failure of one or more clinical trials may occur at any stage. Of the large number of
products in development, only a small percentage successfully complete the FDA regulatory approval process and are commercialized.
We have never obtained
marketing approval from the FDA or any comparable foreign regulatory authority for any product candidate. Our ability to obtain regulatory approval of our product candidates depends on, among other things, whether our clinical trials demonstrate
statistically significant efficacy with safety issues that do not potentially outweigh the therapeutic benefit of the product candidates, and whether the regulatory agencies agree that the data from our future clinical trials is sufficient to
support approval for any of our product candidates. The final results of our current and future clinical trials may not meet the FDAs or other regulatory agencies requirements to approve a product candidate for marketing, and the
regulatory agencies may otherwise determine that our manufacturing processes or facilities are insufficient to support approval. We may need to conduct more clinical trials than we currently anticipate. Even if we do receive FDA or other regulatory
agency approval, we may not be successful in commercializing approved product candidates. If any of these events occur, our business could be materially harmed and the value of our common stock would likely decline.
Our clinical development of NeoCart could be substantially delayed if the FDA requires us to conduct additional studies or trials or imposes other
requirements or restrictions.
We will need to generate and provide the FDA with comparability data from our new raw material production for the
collagen critical raw materials used in our manufacturing process and intended for clinical use. The FDA may also require us to generate additional preclinical or clinical data to support the use of these new critical raw material suppliers in our
NeoCart Phase 3 clinical trial. Additionally, the FDA may impose other requirements on the protocol for our NeoCart Phase 3 clinical trial. These additional requirements may cause further delays in our NeoCart Phase 3 clinical trial which could
require us to incur additional development costs, seek funding for these increased costs or delay or cease our clinical development activities for NeoCart. Any inability to advance NeoCart or any other product candidate through clinical development
would have a material adverse effect on our business. For example, the recently enacted Food and Drug Administration Safety and Innovation Act made permanent the Pediatric Research Equity Act, which requires a sponsor to conduct pediatric studies
for most tissue regeneration products for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under the Pediatric Research Equity Act, original NDAs and BLAs and supplements thereto must
contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must evaluate the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and support
dosing and administration for each pediatric subpopulation for which the product is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all of the pediatric subpopulations, and it is likely that we will
request such a deferral. A deferral may be granted for several reasons, including a finding that the tissue regeneration products is ready for approval for use in adults before pediatric studies are complete or that additional safety or
effectiveness data needs to be collected before the pediatric studies begin. The FDA must send a non-compliance letter to any sponsor that fails to submit the required assessment, keep a deferral current or fails to submit a request for approval of
a pediatric formulation.
We are subject to numerous U.S. federal and state laws pertaining to health care fraud and abuse, including anti-kickback,
self-referral, false claims and fraud laws, and any violation by us of such laws could result in fines or other penalties.
If one or more of our
product candidates is approved, we will be subject to U.S. federal and state laws intended to prevent health care fraud and abuse. The federal anti-kickback statute prohibits the offer, receipt, or payment of remuneration in exchange for or to
induce the referral of patients or the use of products or services that would be paid for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including
cash, improper discounts, and free or reduced price items and services. Many states have similar laws that apply to their state health care programs as well as private payors. Violations of the anti-kickback laws can result in exclusion from federal
health care programs and substantial civil and criminal penalties.
The False Claims Act imposes liability on persons who, among other things, present or
cause to be presented false or fraudulent claims for payment by a federal health care program. The False Claims Act has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not
provided as claimed, or for services that are not medically necessary. The False Claims Act includes a whistleblower provision that allows individuals to bring actions on behalf of the federal government and share a portion of the recovery of
successful claims. If our marketing or other arrangements were determined to
48
violate the False Claims Act or anti-kickback or related laws, then our revenue could be adversely affected, which would likely harm our business, financial condition and results of operations.
State and federal authorities have aggressively targeted medical technology companies for alleged violations of these anti-fraud statutes, based on
improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes and other improper promotional practices. Companies targeted in such prosecutions have paid
substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans or Corporate Integrity Agreements, and have often become subject to consent decrees severely restricting the manner in
which they conduct their business. If we become the target of such an investigation or prosecution based on our contractual relationships with providers or institutions, or our marketing and promotional practices, we could face similar sanctions,
which would materially harm our business.
The Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and
their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts
committed by our employees, future distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of
operations and reputation.
Also, the Physician Payment Sunshine Act imposes new reporting and disclosure requirements on drug, device, biologic and
medical supply manufacturers for any transfer of value made or distributed to prescribers and other healthcare providers. In addition, device and drug manufacturers will also be required to report and disclose any investment interests
held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in significant civil monetary penalties.
Our failure to comply with extensive governmental regulation may significantly affect our operating results.
Even if we obtain regulatory approval for some or all of our product candidates, we will continue to be subject to extensive ongoing requirements by the FDA,
as well as by a number of foreign, national, state and local agencies.
These regulations will impact many aspects of our operations, including testing,
research and development, manufacturing, safety, efficacy, labeling, storage, quality control, adverse event reporting, import and export, record keeping, approval, distribution, advertising and promotion of our future products. We must also submit
new or supplemental applications and obtain FDA approval for certain changes to an approved product, product labeling or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA and report on
ongoing clinical trials. The FDA enforces post-marketing regulatory requirements, including cGMP requirements, through periodic unannounced inspections. We do not know whether we will pass any future FDA inspections. Failure to pass an inspection
could disrupt, delay or shut down our manufacturing operations. Failure to comply with applicable regulatory requirements could, among other things, result in:
|
|
|
administrative or judicial enforcement actions;
|
|
|
|
changes to advertising;
|
|
|
|
failure to obtain marketing approvals for our product candidates;
|
|
|
|
revocation or suspension of regulatory approvals of products;
|
|
|
|
product seizures or recalls;
|
|
|
|
court-ordered injunctions;
|
|
|
|
delay, interruption or suspension of product manufacturing, distribution, marketing and sales; or
|
|
|
|
civil or criminal sanctions.
|
The discovery of previously unknown problems with our product candidates or
future products may result in restrictions of the products, including withdrawal from the market. In addition, the FDA may revisit and change its prior determinations with regard to the safety or efficacy of our future products. If the FDAs
position changes, we may be required to change our labeling or cease to manufacture and market our future products.
Even prior to any formal regulatory
action, we could voluntarily decide to cease the distribution and sale or recall any of our future products if concerns about their safety or efficacy develop.
49
In their regulation of advertising and other promotion, the FDA and the U.S. Federal Trade Commission may issue
correspondence alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA and the U.S. Federal Trade Commission are authorized to impose a wide array of sanctions on companies for such advertising and
promotion practices, which could result in any of the following:
|
|
|
our incurrence of substantial expenses, including fines, penalties, legal fees and costs to comply with the FDAs requirements;
|
|
|
|
our being required to change in the methods of marketing and selling products;
|
|
|
|
our being required to take FDA mandated corrective action, which may include placing advertisements or sending letters to physicians rescinding previous advertisements or promotions; or
|
|
|
|
a disruption in the distribution of products and loss of sales until compliance with the FDAs position is obtained.
|
Improper promotional activities may also lead to investigations by federal or state prosecutors, and result in criminal and civil penalties. If we become
subject to any of the above requirements, it could be damaging to our reputation and restrict our ability to sell or market our future products, and our business condition could be adversely affected. We may also incur significant expenses in
defending ourselves.
Physicians may prescribe pharmaceutical or biologic products for uses that are not described in a products labeling or differ
from those tested by us and approved by the FDA. While such off-label uses are common and the FDA does not regulate physicians choice of treatments, the FDA does restrict a manufacturers communications on the subject of
off-label use. Companies cannot promote FDA-approved pharmaceutical or biologic products for off-label uses, but under certain limited circumstances they may disseminate to practitioners articles published in peer-reviewed journals. To the
extent allowed by the FDA, we intend to disseminate peer-reviewed articles on our future products to practitioners. If, however, our activities fail to comply with the FDAs regulations or guidelines, we may be subject to warnings from, or
enforcement action by, the FDA or other regulatory or law enforcement authorities.
Depending on the circumstances, failure to meet post-approval
requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, or refusal to allow us to
enter into supply contracts, including government contracts. Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity.
Even if we obtain regulatory approval for a product candidate, our products will remain subject to regulatory scrutiny.
Any product candidate for which we obtain marketing approval, along with the manufacturing processes, qualification testing, post-approval clinical data,
labeling and promotional activities for such product, will be subject to continuing and additional requirements of the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information,
reports, registration and listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, and recordkeeping. Even if marketing approval of a product candidate is granted,
the approval may be subject to limitations on the indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the
product. The FDA closely regulates the post-approval marketing and promotion of pharmaceutical and biological products to ensure such products are marketed only for the approved indications and in accordance with the provisions of the approved
labeling.
In addition, later discovery of previously unknown problems with our products, manufacturing processes, or failure to comply with regulatory
requirements, may lead to various adverse results, including:
|
|
|
restrictions on such products, manufacturers or manufacturing processes;
|
|
|
|
restrictions on the labeling or marketing of a product;
|
|
|
|
restrictions on product distribution or use;
|
|
|
|
requirements to conduct post-marketing clinical trials;
|
|
|
|
requirements to institute a risk evaluation and mitigation strategy to monitor safety of the product post-approval;
|
|
|
|
warning letters issued by the FDA or other regulatory authorities;
|
|
|
|
withdrawal of the products from the market;
|
|
|
|
refusal to approve pending applications or supplements to approved applications that we submit;
|
|
|
|
recalls of products, fines, restitution or disgorgement of profits or revenue;
|
50
|
|
|
suspension, revocation or withdrawal of marketing approvals;
|
|
|
|
refusal to permit the import or export of our products; or
|
|
|
|
injunctions or the imposition of civil or criminal penalties.
|
The FDAs policies may change and
additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies,
or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability.
Risks Related to Our Intellectual Property
Our
success depends on our ability to protect our intellectual property and our proprietary technologies.
Our commercial success depends in part on
our ability to obtain and maintain patent protection and trade secret protection for our product candidates, proprietary technologies and their uses as well as our ability to operate without infringing upon the proprietary rights of others. There
can be no assurance that our patent applications or those of our licensors will result in additional patents being issued or that issued patents will afford sufficient protection against competitors with similar technology, nor can there be any
assurance that the patents issued will not be infringed, designed around, or invalidated by third parties. Even issued patents may later be found unenforceable or may be modified or revoked in proceedings instituted by third parties before various
patent offices or in courts. The degree of future protection for our proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or permit us to gain or keep any competitive advantage. This
failure to properly protect the intellectual property rights relating to these product candidates could have a material adverse effect on our financial condition and results of operations.
Composition-of-matter patents are generally considered to be the strongest form of intellectual property protection as such patents provide protection without
regard to any method of use. We cannot be certain that the claims in our patent applications covering composition-of-matter of our product candidates will be considered patentable by the U.S. Patent and Trademark Office and courts in the United
States or by the patent offices and courts in foreign countries, nor can we be certain that the claims in our issued composition-of-matter patents will not be found invalid or unenforceable if challenged. Method-of-use patents protect the use of a
product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for a use that is outside the scope of the patented method. Moreover, even if competitors do not
actively promote their product for our targeted indications, physicians may prescribe these products off-label. Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is
common and such infringement is difficult to prevent or prosecute.
The patent application process is subject to numerous risks and uncertainties, and
there can be no assurance that we or any of our future development partners will be successful in protecting our product candidates by obtaining and defending patents. These risks and uncertainties include the following:
|
|
|
The U.S. Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are
situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the
market earlier than would otherwise have been the case.
|
|
|
|
Patent applications may not result in any patents being issued.
|
|
|
|
Patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable, or otherwise may not provide any competitive advantage.
|
|
|
|
Our competitors, many of whom have substantially greater resources than we do and many of whom have made significant investments in competing technologies, may seek or may have already obtained patents that will limit,
interfere with, or eliminate our ability to make, use and sell our potential product candidates.
|
|
|
|
There may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent protection both inside and outside the United States for treatments that prove successful, as a
matter of public policy regarding worldwide health concerns.
|
|
|
|
Countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop, and market competing
product candidates.
|
In addition, we rely on the protection of our trade secrets and proprietary know-how. Although we have taken steps to
protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential
51
information and inventions agreements with employees, consultants and advisors, third parties may still obtain this information or may come upon this or similar information independently. If any
of these events occurs or if we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.
If we or any of our future development or collaborative partners are sued for infringing intellectual property rights of third parties, it will be
costly and time consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business.
Our success also
depends on our ability and the ability of our current or future development or collaborative partners to develop, manufacture, market and sell our product candidates without infringing upon the proprietary rights of third parties. Numerous U.S. and
foreign-issued patents and pending patent applications owned by third parties exist in the fields in which we are developing product candidates, some of which may contain claims that overlap with the subject matter of our intellectual property or
are directed at our product candidates. When we become aware of patents held by third parties that may implicate the manufacture, development or commercialization of our product candidates, we evaluate our need to license rights to such patents. If
we need to license rights from third parties to manufacture, develop or commercialize our product candidates, there can be no assurance that we will be able to obtain a license on commercially reasonable terms or at all.
Because patent applications can take many years to issue there may be currently pending applications, unknown to us, that may later result in issued patents
upon which our product candidates or proprietary technologies may infringe. Similarly, there may be issued patents relevant to our product candidates of which we are not aware.
There is a substantial amount of litigation involving patent and other intellectual property rights in the biologics industry generally. If a third-party
claims that we or any of our licensors, suppliers or development partners infringe upon a third-partys intellectual property rights, we may have to:
|
|
|
seek to obtain licenses that may not be available on commercially reasonable terms, if at all;
|
|
|
|
abandon an infringing product candidate or redesign our products or processes to avoid infringement;
|
|
|
|
pay substantial damages including, in an exceptional case, treble damages and attorneys fees, which we may have to pay if a court decides that the product candidate or proprietary technology at issue infringes
upon or violates the third-partys rights;
|
|
|
|
pay substantial royalties or fees or grant cross-licenses to our technology; or
|
|
|
|
defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.
|
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and
unsuccessful.
Competitors may infringe upon our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be
required to file infringement claims, which can be expensive and time consuming. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, found to be unenforceable or interpreted
narrowly and could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation.
Most of our competitors are larger than we are and have substantially
greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise
the funds necessary to continue our clinical trials, continue our internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our product candidates to market.
In addition, any future patent litigation, interference or other administrative proceedings will result in additional expense and distraction of our
personnel. An adverse outcome in such litigation or proceedings may expose us, or any of our future development partners to loss of our proprietary position, expose us to significant liabilities or require us to seek licenses that may not be
available on commercially acceptable terms, if at all.
52
Our issued patents could be found invalid or unenforceable if challenged in court which could have a
material adverse effect on our business.
If we or any of our future development partners were to initiate legal proceedings against a third party
to enforce a patent covering one of our product candidates or one of our future product candidates, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims
alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non- enablement. Grounds for an
unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the U.S. Patent and Trademark Office, or made a misleading statement, during prosecution. Third parties may
also raise similar claims before the U.S. Patent and Trademark Office even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for
example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least
part, and perhaps all, of the patent protection on such product candidate. Such a loss of patent protection would have a material adverse impact on our business.
We may be subject to claims that our consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other
clients or former employers to us, which could subject us to costly litigation.
As is common in the biotechnology industry, we engage the services
of consultants to assist us in the development of our product candidates. Many of these consultants were previously employed at, or may have previously or may be currently providing consulting services to, other biotechnology or pharmaceutical
companies, including our competitors or potential competitors. We may become subject to claims that our company or a consultant inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or
their former or current clients. 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 our management team.
Changes in U.S. patent law could diminish the value of patents in general, which could materially impair our ability to protect our product candidates.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and
enforcing patents in the biotechnology industry involve technological and legal complexity. Therefore, obtaining and enforcing biotechnology patents is costly, time consuming and inherently uncertain. In addition, Congress recently passed patent
reform legislation. The Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition
to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal
courts and the U.S. Patent and Trademark Office, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents we might obtain in the
future.
We may not be able to protect our intellectual property rights throughout the world which could materially, negatively affect our business.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our
intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal
and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the
United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have
patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from
competing.
53
Many companies have encountered significant problems in protecting and defending intellectual property rights in
foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could
make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs
and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims
against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be
inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license and may adversely affect our business.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our
business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or
declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. Over
the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected.
Risks Related to Our Common Stock
The trading
price of our common stock has been, and is likely to continue to be, volatile, and you might not be able to sell your shares at or above the price you paid.
We completed our initial public offering in December 2014 at an initial price to the public of $11.00 per share. Subsequently, as of November 7, 2017 our
common stock has traded as low as $1.39 per share. The realization of any of the risks described in these risk factors or other unforeseen risks could have a dramatic and adverse effect on the market price of our common stock. The trading price of
our common stock 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. These factors include those discussed elsewhere in this Risk
Factors section and others such as:
|
|
|
the delay or failure in initiating, enrolling or completing preclinical studies or clinical trials, or unsatisfactory results of these trials;
|
|
|
|
announcements about us or about our competitors including clinical trial results, regulatory approvals, or new product candidate introductions and the revenue and growth potential of such new products;
|
|
|
|
developments concerning our current or future development partner, licensors or product candidate manufacturers;
|
|
|
|
litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
|
|
|
|
conditions in the pharmaceutical or biotechnology industries and the economy as a whole;
|
|
|
|
governmental regulation and legislation;
|
|
|
|
the recruitment or departure of members of our board of directors, management team or other key personnel;
|
|
|
|
changes in our operating results;
|
|
|
|
any changes in the financial projections we may provide to the public, our failure to meet these projections, or changes in recommendations by any securities analysts that elect to follow our common stock;
|
|
|
|
any change in securities analysts estimates of our performance, or our failure to meet analysts expectations;
|
|
|
|
the expiration of market standoff or contractual lock-up agreements;
|
|
|
|
sales or potential sales of substantial amounts of our common stock; and
|
|
|
|
price and volume fluctuations in the overall stock market or resulting from inconsistent trading volume levels of our shares.
|
In recent months and years, the stock market in general, and the market for pharmaceutical and biotechnological companies in particular, has experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. In addition, Brexit or actions taken
by the new presidential administration and Congress could adversely affect United States, European or worldwide
54
economic or market conditions and could contribute to instability and volatility in global financial markets. Broad market and industry factors may seriously affect the market price of our common
stock, regardless of our actual operating performance.
Our quarterly operating results may fluctuate substantially, which may cause the price of
our common stock to fluctuate substantially.
We expect our quarterly operating results to be subject to fluctuations. Our net income or loss and
other operating results may be affected by numerous factors, including:
|
|
|
any variations in the level of expenses related to our development and expected commercialization of NeoCart;
|
|
|
|
derivative instruments recorded at fair value;
|
|
|
|
the addition or termination of any clinical trials;
|
|
|
|
any regulatory or clinical developments affecting NeoCart; and
|
|
|
|
the nature and terms of any stock-based compensation grants and any intellectual property infringement lawsuits in which we may become involved.
|
If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.
Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be
relied upon as an indication of our future performance.
Our stock price may continue to be volatile, and securities class action litigation has
often been instituted against companies following periods of volatility of their stock price. Any such litigation, if instituted against us, could result in substantial costs and a diversion of our managements attention and resources.
In the past, following periods of volatility in the overall market and the market price of a particular companys securities, securities
class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our managements attention and resources.
55
If securities analysts do not publish research or publish unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that
securities and industry analysts publish about us or our business. We currently have limited research coverage by securities analysts. If no additional securities or industry analysts commence coverage of our company, the trading price for our stock
could suffer. In the event we obtain additional securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business, or if our clinical trials or operating
results fail to meet the analysts expectations, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could
cause our stock price and trading volume to decline.
Raising additional funds by issuing securities or through licensing or lending arrangements
may cause dilution to our existing stockholders, restrict our operations or require us to relinquish proprietary rights.
We will need to raise
additional funding in order to file a BLA for NeoCart, create additional manufacturing capacity and to commercialize NeoCart and to conduct the research and development and clinical and regulatory activities necessary to bring other product
candidates to market. To the extent that we raise additional capital by issuing equity securities, the share ownership of existing stockholders will be diluted. Any future debt financing may involve covenants that restrict our operations, including
limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments, and engage in certain merger, consolidation, or asset sale transactions. In addition, if we seek funds through arrangements with
collaborative partners, these arrangements may require us to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us.
We have never paid and do not intend to pay cash dividends and, consequently, your ability to achieve a return on your investment will depend on
appreciation in the price of our common stock.
We have never paid cash dividends on any of our capital stock, and we currently intend to retain
future earnings, if any, to fund the development and growth of our business. Therefore, you are not likely to receive any dividends on our common stock for the foreseeable future or at all. Since we do not intend to pay dividends, your ability to
receive a return on your investment will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which you have purchased it.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject
to stockholder approval.
As of November 7, 2017, our executive officers, directors, holders of more than 5% of our capital stock and their
respective affiliates beneficially owned 58% of our outstanding capital stock. These stockholders have the ability to influence us through their ownership position. These stockholders are able to determine all matters requiring stockholder approval.
For example, these stockholders are able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited
acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
Substantial future
sales of shares by existing stockholders, including pursuant to our equity incentive plans, or the perception that such sales may occur, could cause our stock price to decline.
A small number of institutional investors and private equity funds hold a significant number of shares of our common stock and all of our shares of Series A
Convertible Preferred Stock and warrants to purchase our common stock issued in our September 2016 private placement. If these existing stockholders, particularly our directors and executive officers and the venture capital funds affiliated with our
current and former directors, sell substantial amounts of our common stock in the public market, or are perceived by the public market as intending to sell substantial amounts of our common stock, the trading price of our common stock could decline.
Some of pre-IPO existing security holders have demand and piggyback rights to require us to register with the SEC up to 4,479,418 shares of our common
stock. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market, subject to Rule 144 transfer restrictions applicable to affiliates. In November 2016, we registered 26,800,001
shares of common stock for resale by selling stockholders, including 10,737,275 shares of common stock underlying our outstanding Series A Convertible Preferred Stock and 13,466,667 shares of common stock underlying outstanding warrants issued in
connection with our September 2016 private placement. The selling stockholders in the private placement are able to freely trade such shares of common stock, subject to Rule 144 transfer restrictions applicable to affiliates. We have registered an
additional 2,436,666 shares of our
56
common stock that we may issue under our equity plans. Once we issue these shares, they can be freely sold in the public market upon issuance, contractual lock-up agreements, or Rule 144 transfer
restrictions applicable to affiliates.
We may not satisfy The NASDAQ Capital Markets requirements for continued listing. If we cannot satisfy
these requirements, NASDAQ could delist our common stock.
Our common stock is listed on The NASDAQ Capital Market under the symbol
HSGX. To continue to be listed on NASDAQ, we are required to satisfy a number of conditions. We previously received two letters from NASDAQ, with the first letter in November 2016 notifying us of our failure to maintain a minimum market
value of listed securities of $50,000,000 for the 30 consecutive business days. We subsequently regained compliance with this listing standard in March 2017. The second letter in May 2017 notified us of our failure to maintain a minimum of
$10,000,000 in stockholders equity as required for companies trading on The NASDAQ Global Market. In response to the second letter, we transferred our securities to The NASDAQ Capital Market in June 2017 to regain compliance with the minimum
stockholders equity requirement
.
We cannot assure you that we will be able to satisfy the NASDAQ listing requirements in the future. If we
are delisted from NASDAQ, trading in our shares of common stock may be conducted, if available, on the OTC Bulletin Board Service or, if available, via another market. In the event of such delisting, an investor would likely find it
significantly more difficult to dispose of, or to obtain accurate quotations as to the value of the shares of our common stock, and our ability to raise future capital through the sale of the shares of our common stock or other securities
convertible into or exercisable for our common stock could be severely limited. A determination could also then be made that our common stock is a penny stock which would require brokers trading in our common stock to adhere to more
stringent rules and possibly result in a reduced level of trading. This could have a long-term impact on our ability to raise future capital through the sale of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay or prevent
a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.
Our certificate of
incorporation and bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may
deem advantageous. These provisions among other things:
|
|
|
establish a classified board of directors so that not all members of our board are elected at one time;
|
|
|
|
permit the board of directors to establish the number of directors;
|
|
|
|
provide that directors may only be removed for cause;
|
|
|
|
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
|
|
|
|
authorize the issuance of blank check preferred stock that our board of directors could use to implement a stockholder rights plan;
|
|
|
|
eliminate the ability of our stockholders to call special meetings of stockholders;
|
|
|
|
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
|
|
|
|
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
|
|
|
|
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
|
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203
imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our common stock.
We
are an emerging growth company and the extended transition period for complying with new or revised financial accounting standards and reduced disclosure and governance requirements applicable to emerging growth companies could make our common stock
less attractive to investors.
We are an emerging growth company. Under the Jumpstart Our Business Startups Act, emerging growth companies can
delay adopting new or revised accounting standards until such time as those standards apply to private companies. We plan to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same
new or revised accounting standards as other public companies that are not emerging growth companies.
57
For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other
exemptions from various reporting requirements that are applicable to other public companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of
holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation on our internal control over financial reporting and exemption
from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditors report providing additional information about the audit and the financial
statements (auditor discussion and analysis). If we do, the information that we provide stockholders may be different than what is available with respect to other public companies.
Investors could find our common stock less attractive because we will rely on these exemptions, which may make it more difficult for investors to compare our
business with other companies in our industry. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, it may be
difficult for us to raise additional capital as and when we need it. If we are unable to do so, our financial condition and results of operations could be materially and adversely affected.
We will remain an emerging growth company until the earliest of: (1) the end of the fiscal year in which the market value of our common stock that is
held by non-affiliates exceeds $700.0 million as of the end of the second fiscal quarter; (2) the end of the fiscal year in which we have total annual gross revenue of $1.0 billion or more during such fiscal year; (3) the date on
which we issue more than $1.0 billion in non-convertible debt in a three-year period or (4) December 31, 2019, the end of the fiscal year following the fifth anniversary of the completion of our initial public offering.