RISK
FACTORS
An
investment in our shares of common stock involves a high degree of risk. Prior to making a decision about investing in our shares
of common stock, you should carefully consider the risks, uncertainties and assumptions discussed under Item 1A, “Risk Factors,”
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and any subsequent updates described in our Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, all of which are incorporated herein by reference and may be amended, supplemented
or superseded from time to time by other reports we file with the SEC in the future, together with information in this prospectus
and any other information incorporated by reference into this prospectus, including the risk factors set forth below. See the
sections of this prospectus entitled “Additional Information” and “Incorporation of Certain Information by Reference.”
Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business.
If any of these risks occur, our business, financial condition and operating results could be harmed, the trading price of our
common stock could decline and you could lose part or all of your investment.
This
prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described
below and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements” for information relating
to these forward-looking statements.
Risk
Related to our Company and our Business
Risks
Related to Our Financial Position and Need for Capital
We
are a clinical stage pharmaceutical company with a limited operating history
.
We
are a clinical stage pharmaceutical company with a limited operating history. We have to complete clinical studies and
receive regulatory approval of a New Drug Application, or NDA, before commercial sales of a product can commence. The likelihood
of success of our business plan must be considered in light of the problems, substantial expenses, difficulties, complications
and delays frequently encountered in connection with developing and expanding early-stage businesses and the regulatory and competitive
environment in which we operate. Pharmaceutical product development is a highly speculative undertaking, involves a substantial
degree of risk and is a capital-intensive business.
Accordingly,
you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies
in the early stages of development, especially clinical pharmaceutical companies such as ours. Potential investors should carefully
consider the risks and uncertainties that a company with a limited operating history will face. In particular, potential investors
should consider that we cannot assure you that we will be able to:
● successfully
implement or execute our current business plan, and we cannot assure you that our business plan is sound;
● successfully
manufacture our clinical product and establish commercial drug supply;
● obtain
Drug Enforcement Administration, or DEA, licenses necessary for the manufacturing of anabasum and for evaluating anabasum in our
clinical trials;
● successfully
complete the clinical trials necessary to obtain regulatory approval for the marketing of anabasum;
● secure
market exclusivity and/or adequate intellectual property protection for anabasum;
● attract
and retain an experienced management and advisory team;
● secure
acceptance of anabasum in the medical community and with third party payors and consumers;
● launch
commercial sales of anabasum, whether alone or in collaboration with others; and
● raise
sufficient funds in the capital markets to effectuate our business plan.
If
we cannot successfully execute any one of the foregoing, our business may not succeed and your investment will be adversely affected.
We
have incurred operating losses in each year since our inception and expect to continue to incur substantial losses for the foreseeable
future. We may never become profitable or, if we achieve profitability, be able to sustain profitability.
We
expect to incur substantial expenses without corresponding revenues unless and until we are able to obtain regulatory approval
and successfully commercialize anabasum. We have been engaged in developing anabasum since 2009. To date, we have not generated
any revenue from anabasum and we expect to incur significant expense to complete our clinical program for anabasum in the United
States and elsewhere. We may never be able to obtain regulatory approval for the marketing of anabasum in any indication in the
United States or internationally. Even if we are able to commercialize anabasum or any other product candidate, there can be no
assurance that we will generate significant revenues or ever achieve profitability. Our net losses for the nine months ended September
30, 2017 and 2016 and for the years ended December 31, 2016 and December 31, 2015 were approximately $21,728,000, $12,428,000,
$19,999,000 and $8,851,000, respectively. As of September 30, 2017, we had an accumulated deficit of approximately $55,004,000.
If
we were to obtain FDA approval for anabasum, we would expect that our research and development expenses will continue to increase
as we advance clinical trials for indications for the treatment of cystic fibrosis, systemic sclerosis, dermatomyositis and systemic
lupus erythematosus, or SLE. We may elect to pursue FDA approval for anabasum in other indications, which will result in significant
additional research and development expenses. As a result, we expect to continue to incur substantial losses for the foreseeable
future, and these losses will increase. We are uncertain when or if we will be able to achieve or sustain profitability. If we
achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Failure to become and
remain profitable would impair our ability to sustain operations and adversely affect the price of our common stock and our ability
to raise capital.
Our
cash or cash equivalents will only fund our operations for a limited time and we will need to raise additional capital to support
our development and commercialization efforts.
We
are currently operating at a loss and expect our operating costs will increase significantly as we incur further costs
related to the clinical trials for anabasum. As of September 30, 2017, we held cash and cash equivalents of approximately
$36.6 million. In October 2017, we completed an underwritten public offering of shares of our common stock pursuant to which we
sold an aggregate of 5,347,500 shares of our common stock and received net proceeds of approximately $35.0 million. We expect
our cash and cash equivalents at September 30, 2017 together with the proceeds from the October 2017 offering and the remaining
milestone payment of $500,000 from Cystic Fibrosis Foundation Therapeutics, Inc., which we received in November 2017, to be sufficient
to meet our operating and capital requirements into the fourth quarter of 2019 based on current planned expenditures.
Other
than the Controlled Equity Offering
SM
Sales Agreement, or the Sales Agreement, between us and Cantor Fitzgerald &
Co., dated January 5, 2018, pursuant to which we may offer and sell up to $50.0 million of shares of our common stock from time
to time through Cantor Fitzgerald & Co. acting as sales agent
,
we do not currently have any arrangements or credit facilities in place as a source of funds, and there can be no assurance
that we will be able to raise sufficient additional capital on acceptable terms, or at all, including pursuant to the Sales
Agreement due to limiting terms contained therein and sales thereunder being subject to market conditions. If we are
not successful in raising additional capital, we may not be able to continue as a going concern. We may seek additional capital
through a combination of private and public equity offerings, debt financings and strategic collaborations. Debt financing, if
obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as
incurring additional debt, and could increase our expenses and require that our assets secure such debt.
Equity
financing, if obtained, could result in dilution to our then existing stockholders and/or require such stockholders to waive certain
rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, we may be required
to delay, scale back or eliminate the development of business opportunities and our operations and financial condition may be
materially adversely affected. We can provide no assurances that any additional sources of financing will be available to us on
favorable terms, if at all. In addition, if we are unable to secure sufficient capital to fund our operations, we may choose
to pursue, as an alternative, strategic collaborations that could require us to share commercial rights to anabasum with third
parties in ways that we currently do not intend or on terms that may not be favorable to us. If we choose to pursue additional
indications and/or geographies for anabasum or otherwise expand more rapidly than we presently anticipate we may also need to
raise additional capital sooner than expected.
Risks
Related to Product Development, Regulatory Approval, Manufacturing and Commercialization
We
depend entirely on the success of anabasum. If we are unable to generate revenues from anabasum, our ability to create stockholder
value will be limited.
Our
only product candidate currently is anabasum, for which we have completed Phase 1 safety studies which we are evaluating
in subsequent clinical studies. We do not generate revenues from any FDA approved drug products and have no other product
candidates in development. There is no guarantee that our clinical trials will be successful or that we will continue with clinical
studies to support an approval from the FDA for any indication. We note that most drug candidates never reach the clinical development
stage and even those that do have only a small chance of successfully completing clinical development and gaining regulatory approval.
Therefore, our business currently depends entirely on the successful development, regulatory approval and commercialization of
anabasum, which may never occur.
If
we are not able to obtain any required regulatory approvals for anabasum, we will not be able to commercialize our only product
candidate and our ability to generate revenue will be limited.
Our
clinical trials may be unsuccessful, which would materially harm our business. Even if our ongoing clinical trials are
successful, we will be required to conduct additional clinical trials to establish anabasum’s safety and efficacy,
before a New Drug Application, or NDA, can be filed with the FDA for marketing approval of anabasum.
Clinical
testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success
in early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim
results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur
at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that
could delay or prevent our ability to receive regulatory approval or commercialize anabasum. The research, testing, manufacturing,
labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of
drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries,
which regulations differ from country to country. We are not permitted to market anabasum as a prescription pharmaceutical product
in the United States until we receive approval of an NDA from the FDA or comparable regulatory agencies for sales in foreign
markets until we receive the requisite approval from such countries. In the United States, the FDA generally requires the
completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure
its quality before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large
number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer are eventually
approved for commercialization. We have never submitted an NDA to the FDA or comparable applications to other regulatory authorities.
If our development efforts for anabasum, including regulatory approval, are not successful for its planned indications, or if
adequate demand for anabasum is not generated, our business will be harmed.
Receipt
of necessary regulatory approval is
subject to a number of
risks, including the following:
● the
FDA or comparable foreign regulatory authorities or institutional review boards, or IRBs, may disagree with the design or implementation
of our clinical trials;
● we
may not be able to provide acceptable evidence of anabasum’s safety and efficacy;
● the
results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required
by the FDA, European Medicines Agency, or EMA, or other comparable foreign regulatory authorities for marketing approval;
● the
dosing of anabasum in a particular clinical trial may not be at an optimal level;
● patients
in our clinical trials may suffer adverse effects for reasons that may or may not be related to anabasum;
● the
data collected from clinical trials may not be sufficient to support the submission of an NDA or other submission or to obtain
regulatory approval in the United States or elsewhere;
● the
FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; and
● the
approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
Failure
to obtain regulatory approval for anabasum for the foregoing or any other reasons will prevent us from commercializing this product
candidate as a prescription product, and our ability to generate revenue will be materially impaired. We cannot guarantee that
regulators will agree with our assessment of the results of our clinical trials or that such trials will be considered
by regulators to have shown safety or efficacy of our product candidates. The FDA, EMA and other regulators have substantial
discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval
and require additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained
from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate.
We
have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants
and third party contract research organizations, or CROs, with expertise in this area to assist us in this process. Securing FDA
approval requires the submission of pre-clinical, clinical and/or pharmacokinetic data, information about product manufacturing
processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish a product
candidate’s safety and efficacy for each indication. Anabasum may prove to have undesirable or unintended side effects,
toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use with
respect to one or all intended indications.
The
process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially
based upon, among other things, the type, complexity and novelty of the product candidates involved, the jurisdiction in which
regulatory approval is sought and the substantial discretion of the regulatory authorities. Changes in the regulatory approval
policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory
review for a submitted product application may cause delays in the approval or rejection of an application. Regulatory approval
obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions
in which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek
approval in a different jurisdiction. Failure to obtain regulatory marketing approval for anabasum in any indication will prevent
us from commercializing the product candidate, and our ability to generate revenue will be materially impaired.
Clinical
drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials
may not be predictive of future trial results.
Clinical
testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time
during the clinical trial process. The results of pre-clinical studies and early clinical trials may not be predictive of the
results of later-stage clinical trials. We cannot assure you that the FDA will view the results as we do or that any future trials
of anabasum will achieve positive results. Product candidates in later stages of clinical trials may fail to show the desired
safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies
in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse
safety profiles, notwithstanding promising results in earlier trials. Any future clinical trial results for anabasum may not be
successful.
In
addition, a number of factors could contribute to a lack of favorable safety and efficacy results for anabasum. For example, such
trials could result in increased variability due to varying site characteristics, such as local standards of care, differences
in evaluation period and surgical technique, and due to varying patient characteristics, including demographic factors and health
status.
Anabasum
is our only product candidate in development. If we fail to successfully commercialize anabasum, we may need to acquire additional
product candidates and our business will be adversely affected.
We
have never commercialized any product candidates and do not have any other compounds in pre-clinical testing, lead optimization
or lead identification stages beyond anabasum. We cannot be certain that anabasum will prove to be sufficiently effective and
safe to meet applicable regulatory standards for any indication. If we fail to successfully commercialize anabasum as a treatment
for cystic fibrosis, systemic sclerosis, dermatomyositis, SLE or any other indication, whether as a stand-alone therapy or in
combination with other treatments, our business would be adversely affected.
Even
if we receive regulatory approval for anabasum, we still may not be able to successfully commercialize this product, and the revenue
that we generate from its sales, if any, may be limited.
If
approved for marketing, the commercial success of anabasum will depend upon its acceptance by the medical community, including
physicians, patients and health care payors. The degree of market acceptance of anabasum will depend on a number of factors, including:
● demonstration
of clinical safety and efficacy;
● relative
convenience, pill burden and ease of administration;
● the
prevalence and severity of any adverse effects;
● the
willingness of physicians to prescribe anabasum and of the target patient population to try new therapies;
● safety,
tolerability and efficacy of anabasum compared to competing products;
● the
introduction of any new products that may in the future become available to treat indications for which anabasum may be approved;
● new
procedures or methods of treatment that may reduce the incidences of any of the indications in which anabasum may show utility;
● pricing
and cost-effectiveness;
● the
inclusion or omission of anabasum in applicable treatment guidelines;
● the
effectiveness of our or any future collaborators’ sales and marketing strategies;
● limitations
or warnings contained in FDA-approved labeling;
● our
ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including
Medicare and Medicaid, private health insurers and other third-party payors; and
● the
willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement.
If
anabasum is approved, but does not achieve an adequate level of acceptance by physicians, health care payors and patients, we
may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical
community and third-party payors on the benefits of anabasum may require significant resources and may never be successful.
In
addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize
anabasum successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies
the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited
or subject to restrictions or post-approval commitments that render anabasum not commercially viable. For example, regulatory
authorities may approve anabasum for fewer or more limited indications than we request, may not approve the price we intend to
charge for anabasum, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve
anabasum with a label that does not include the labeling claims necessary or desirable for the successful commercialization of
that indication. Further, the FDA or comparable foreign regulatory authorities may place conditions on approvals, such as risk
management plans and a Risk Evaluation and Mitigation Strategy, or REMS, to assure the safe use of the drug. If the FDA concludes
a REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS,
if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted
distribution methods, patient registries and other risk minimization tools. The FDA may also require a REMS for an approved product
when new safety information emerges. Any of these limitations on approval or marketing could restrict the commercial promotion,
distribution, prescription or dispensing of anabasum. Moreover, product approvals may be withdrawn for non-compliance with regulatory
standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially
harm the commercial success of anabasum.
Even
if we obtain marketing approval for anabasum, we will be subject to ongoing obligations and continued regulatory review, which
may result in significant additional expense. Additionally, anabasum could be subject to labeling and other restrictions and withdrawal
from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated
problems with anabasum.
Even
if we obtain United States regulatory approval of anabasum for an indication, the FDA may still impose significant restrictions
on its indicated uses or marketing or the conditions of approval, or impose ongoing requirements for potentially costly and time-consuming
post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety and efficacy. Anabasum
will also be subject to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution,
safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information.
These requirements include registration with the FDA, continued compliance with current Good Clinical Practices regulations, or
cGCPs, for any clinical trials that we conduct post-approval, continued compliance with the CSA and ongoing review by the DEA.
In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the
FDA and other regulatory authorities for compliance with current Good Manufacturing Practices, or cGMP, requirements relating
to quality control, quality assurance and corresponding maintenance of records and documents.
With
respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with
FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in
other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of
the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes,
depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various
fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state
laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate
in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government
drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities
are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist
in many of these areas in other countries.
In
addition, if anabasum is approved for an indication, our product labeling, advertising and promotion would be subject to regulatory
requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription
products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s
approved labeling. If we receive marketing approval for anabasum, physicians may nevertheless legally prescribe our products to
their patients in a manner that is inconsistent with the approved label. However, if we are found to have promoted such
off-label uses, we may become subject to significant liability and government fines. The federal government has levied large civil
and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label
promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified
promotional conduct is changed or curtailed.
If
we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity
or frequency or problems with the facility where the product is manufactured, or if we or our manufacturers fail to comply
with applicable regulatory requirements, we may be subject to the following administrative or judicial sanctions:
●
restrictions on the marketing or manufacturing of the product, withdrawal of the product
from the market, or voluntary or mandatory product recalls;
● issuance
of warning letters or untitled letters;
● injunctions
or the imposition of civil or criminal penalties or monetary fines;
● suspension
of any ongoing clinical trials;
● refusal
to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license
approvals;
● suspension
of, or imposition of restrictions on, operations, including costly new manufacturing requirements; or
● product
seizure or detention or refusal to permit the import or export of product.
The
occurrence of any event or penalty described above may inhibit our ability to commercialize anabasum and generate revenue. Adverse
regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product
liability exposure.
We
currently have no sales and marketing organization. If we are unable to secure a sales and marketing partner or establish satisfactory
sales and marketing capabilities, we may not successfully commercialize anabasum.
At
present, we have no sales or marketing personnel. In order to commercialize products that are approved for commercial sales, we
must either collaborate with third parties that have such commercial infrastructure or develop our own sales and marketing infrastructure.
If we are not successful in entering into appropriate collaboration arrangements, or recruiting sales and marketing personnel
or in building a sales and marketing infrastructure, we will have difficulty successfully commercializing anabasum, which would
adversely affect our business, operating results and financial condition.
We
may not be able to enter into collaboration agreements on terms acceptable to us or at all. In addition, even if we enter into
such relationships, we may have limited or no control over the sales, marketing and distribution activities of these third parties.
Our future revenues may depend heavily on the success of the efforts of these third parties. If we elect to establish a sales
and marketing infrastructure we may not realize a positive return on this investment. In addition, we will have to compete with
established and well-funded pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing
personnel. Factors that may inhibit our efforts to commercialize anabasum without strategic partners or licensees include:
● our
inability to recruit and retain adequate numbers of effective sales and marketing personnel;
● the
inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe anabasum;
● the
lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies
with more extensive product lines; and
● unforeseen
costs and expenses associated with creating an independent sales and marketing organization.
We
face competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete
effectively.
The
biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change.
We have competitors in a number of jurisdictions, many of which have substantially greater name recognition, commercial infrastructures
and financial, technical and personnel resources than we have. Established competitors may invest heavily to quickly discover
and develop novel compounds that could make anabasum obsolete or uneconomical. Any new product that competes with an approved
product may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and safety to be commercially
successful. Other competitive factors, including generic competition, could force us to lower prices or could result in reduced
sales. In addition, new products developed by others could emerge as competitors to anabasum. If we are not able to compete effectively
against our current and future competitors, our business will not grow and our financial condition and operations will suffer.
Recently enacted and future legislation
may increase the difficulty and cost for us to obtain marketing approval of and commercialize anabasum and may affect the
prices we may obtain.
In the United States and some foreign jurisdictions,
there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could
prevent or delay marketing approval for anabasum, restrict or regulate post-approval activities and affect our ability to profitably
sell anabasum. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and
promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether
the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals
of anabasum, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly
delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other
requirements.
In the United States, under the
Medicare Modernization Act, or MMA, Medicare Part D provides coverage to the elderly and disabled for outpatient prescription
drugs by approving and subsidizing prescription drug plans offered by private insurers. The MMA also authorizes Medicare Part
D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic
class. The Part D plans use their formulary leverage to negotiate rebates and other price concessions from drug manufacturers.
Also under the MMA, Medicare Part B provides coverage to the elderly and disabled for physician-administered drugs on the basis
of the drug’s average sale price, a price that is calculated according to regulatory requirements and that the manufacturer
reports to Medicare quarterly.
Both Congress and the Centers for
Medicare & Medicaid Services, or CMS, the agency that administers the Medicare program, from time to time consider
legislation, regulations, or other initiatives to reduce drug costs under Medicare Parts B and D. For example, under the 2010
Affordable Care Act, drug manufacturers are required to provide a 50% discount on prescriptions for branded drugs filled
while the beneficiary is in the Medicare Part D coverage gap, also known as the “donut hole.” There have been
legislative proposals to repeal the “non-interference” provision of the MMA to allow CMS to leverage the Medicare
market share to negotiate larger Part D rebates. Further cost reduction efforts could decrease the coverage and price that we
receive for anabasum and could seriously harm our business. Private payors often follow Medicare coverage policy and payment
limitations in setting their own reimbursement rates, and any reduction in reimbursement under the Medicare program may
result in a similar reduction in payments from private payors.
The 2010 Affordable Care Act is intended
to broaden access to health insurance and reduce or constrain the growth of healthcare spending. Further, the Affordable Care
Act imposes a significant annual fee on companies that manufacture or import branded prescription drug products. It also increased
the amount of the rebates drug manufacturers must pay to state Medicaid programs, required that Medicaid rebates be paid on managed
Medicaid utilization, and increased the additional rebate on “line extensions” (such as extended release formulations)
of solid oral dosage forms of branded products. The law also contains substantial provisions affecting fraud and abuse compliance
and transparency, which may require us to modify our business practices with healthcare practitioners, and incur substantial costs
to ensure compliance.
The President and the majority party
in both Houses of the U.S. Congress have indicated their desire to repeal the Affordable Care Act. It is unclear whether, when
and how that repeal will be effectuated and what the effect on the healthcare sector will be. In addition to the potential repeal
of the Affordable Care Act, there are indications that the Medicaid program may be restructured, which could lead to revisions
in Medicaid coverage for prescription drugs. While we are unable to predict what legislation, if any, may potentially be enacted,
to the extent that future changes affect how our product candidates could be paid for and/or reimbursed by the government and
private payors, our business could be adversely affected.
In addition, other
legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. For
example, the Budget Control Act of 2011 included, among other things, provisions that have led to 2% across-the-board
reductions in Medicare payment amounts. Several states have adopted or are considering adopting laws that require
pharmaceutical companies to provide notice prior to raising prices and to justify price increases. We expect that additional
healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, and in turn could significantly reduce the projected value of
certain development projects and reduce our profitability.
Our
future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory
burdens and other risks and uncertainties.
Our
future profitability will depend, in part, on our ability to commercialize anabasum in foreign markets for which we intend to
rely on collaborations with third parties. If we commercialize anabasum in foreign markets, we would be subject to additional
risks and uncertainties, including:
● our
customers’ ability to obtain reimbursement for anabasum in foreign markets;
● our
inability to directly control commercial activities because we are relying on third parties;
● the
burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;
● different
medical practices and customs in foreign countries affecting acceptance in the marketplace;
● import
or export licensing requirements;
● longer
accounts receivable collection times;
● longer
lead times for shipping;
● language
barriers for technical training;
● reduced
protection of intellectual property rights in some foreign countries;
● foreign
currency exchange rate fluctuations; and
● the
interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
Foreign
sales of anabasum could also be adversely affected by the imposition of governmental controls, political and economic instability,
trade restrictions and changes in tariffs, any of which may adversely affect our results of operations.
If
we market anabasum in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws,
we may be subject to civil or criminal penalties.
The
FDA enforces laws and regulations which require that the promotion of pharmaceutical products be consistent with the approved
prescribing information. While physicians may prescribe an approved product for a so-called “off label” use, it is
unlawful for a pharmaceutical company to promote its products in a manner that is inconsistent with its approved label and any
company which engages in such conduct may be subject to significant liability. Similarly, industry codes in the European Union
and other foreign jurisdictions prohibit companies from engaging in off-label promotion and regulatory agencies in various countries
enforce violations of the code with civil penalties. While we intend to ensure that our promotional materials are consistent with
our label, regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute
other civil or criminal enforcement proceedings. In addition to FDA restrictions on marketing of pharmaceutical products, several
other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing
practices in the pharmaceutical industry. These laws include the U.S. Anti-Kickback Statute, U.S. False Claims Act and similar
state laws. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business
activities could be subject to challenge under one or more of these laws.
The
U.S. Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration
to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item
or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted
broadly to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary
managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities
from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce
prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our
practices may not, in all cases, meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, recent
health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends
the intent requirement of the U.S. Anti-Kickback Statute and criminal health care fraud statutes; a person or entity no longer
needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Health Care Reform Law provides
that the government may assert that a claim including items or services resulting from a violation of the U.S. Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the U.S. False Claims Act. Federal false claims laws prohibit any person
from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making,
or causing to be made, a false statement to get a false claim paid.
Over
the past few years, pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged
promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and
other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by
federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicare or
Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Rebate Program to reduce
liability for Medicaid rebates. Most states also have statutes or regulations similar to the U.S. Anti-Kickback Statute and the
U.S. False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states,
apply regardless of the payor. Sanctions under these federal and state laws may include substantial civil monetary penalties,
exclusion of a manufacturer’s products from reimbursement under government programs, substantial criminal fines and imprisonment.
We
are, and will be, completely dependent on third parties to manufacture anabasum, and our commercialization of anabasum could be
halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from the FDA or comparable
foreign regulatory authorities, fail to provide us with sufficient quantities of anabasum or fail to do so at acceptable quality
levels or prices.
We
do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the active pharmaceutical ingredient,
or the finished anabasum drug product in tablet form, for use in our clinical trials or for commercial product, if any. As a result,
we will be obligated to rely on contract manufacturers if and when anabasum is approved for commercialization.
The
facilities used by our contract manufacturers to manufacture anabasum must be approved by the FDA pursuant to inspections that
will be conducted after we submit our NDA to the FDA. We do not control the manufacturing processes of, and are completely
dependent on, our contract manufacturing partners for compliance with cGMPs for manufacture of both active drug substances and
finished drug products. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping
relating to anabasum. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications
and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval
for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities
for the manufacture of anabasum or if it withdraws any such approval in the future, we may need to find alternative manufacturing
facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market anabasum, if approved.
Our
contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign
agencies for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract manufacturers’
compliance with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations
could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market
anabasum, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could
significantly and adversely affect our business. In addition, we will not have control over the ability of our contract manufacturers
to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract manufacturers to comply
with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory approval for or market
anabasum.
If
for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them,
and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them and we
cannot be certain that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers
or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing
processes for our active pharmaceutical ingredient, or API, or our finished anabasum product or should cease doing business
with us, we could experience significant interruptions in the supply of anabasum or may not be able to create a supply of anabasum
at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of anabasum might be negatively
affected. Our inability to coordinate the efforts of our third party manufacturing partners, or the lack of capacity available
at our third party manufacturing partners, could impair our ability to supply anabasum at required levels. Because of the significant
regulatory requirements that we would need to satisfy in order to qualify a new bulk or finished product manufacturer, if we face
these or other difficulties with our current manufacturing partners, we could experience significant interruptions in the supply
of anabasum if we decided to transfer the manufacture of anabasum to one or more alternative manufacturers in an effort to deal
with the difficulties.
Any
manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally,
we rely on third parties to supply the raw materials needed to manufacture our potential products. Any reliance on suppliers may
involve several risks, including a potential inability to obtain critical materials and reduced control over production costs,
delivery schedules, reliability and quality. Any unanticipated disruption to a future contract manufacturer caused by problems
at suppliers could delay shipment of anabasum, increase our cost of goods sold and result in lost sales.
We
cannot guarantee that our manufacturing and supply partners will be able to manufacture anabasum at commercial scale on a cost-effective
basis. If the commercial-scale manufacturing costs of anabasum are higher than expected, these costs may significantly impact
our operating results. In order to reduce costs, we may need to develop and implement process improvements. However, in order
to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may
be subject to approval by such regulatory authorities. We cannot be sure that we will receive these necessary approvals or that
these approvals will be granted in a timely fashion. We also cannot guarantee that we will be able to enhance and optimize output
in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to reduce our costs over
time.
Our
product candidate, anabasum, is currently classified as a Schedule I controlled substance subject to U.S. controlled substance
laws and regulations, including regulations of the Drug Enforcement Agency and the U.S. Food and Drug Administration. Failure
to obtain the necessary licenses and registrations and failure to comply with these laws could result in the delay in the manufacturing
and distribution of anabasum and could delay the completion of clinical studies. Such delays and the cost of compliance with these
laws and regulations, could adversely affect our business operations and our financial condition.
In
the United States, our product candidate, anabasum, is currently classified as a Schedule I controlled substance as defined in
the Controlled Substance Act, or CSA. This designation is based on anabasum’s chemical structure and pharmacology
(namely, it being a synthetic endocannabinoid mimetic that binds to the CB2 receptor). Even though anabasum’s mechanism
of action is to modulate the immune system and results to date from clinical studies have demonstrated the drug has no psychotropic
effects (which we believe is unlike other members of its chemical class), the DEA classifies anabasum as a Schedule I substance.
Schedule
I controlled substances are pharmaceutical products subject to specific regulations under the CSA, which establishes, among
other things, certain registration, manufacturing quotas, security, recordkeeping, reporting, import, export and other requirements
administered by the DEA. All parties responsible for the manufacturing, distribution and testing of the drug in clinical
studies must apply for and obtain a license from the DEA before they are permitted to perform these activities with anabasum.
Furthermore, these parties must have the security, control, recordkeeping, reporting and inventory mechanisms required by the
DEA to prevent drug loss and diversion. All licensed facilities are required to renew their registrations annually if they intend
to continue to work with our drug. The DEA conducts periodic inspections of certain registered establishments that handle controlled
substances. We have been working with our manufacturers, distributors, exporters and clinical sites to obtain the necessary licenses
to work with anabasum. The parties responsible for the manufacturing, distribution and export of anabasum have already applied
for and have been granted DEA licenses and a number of institutions responsible for conducting our current clinical studies have
also been granted DEA licenses. However, the failure to maintain the necessary registrations, and the delay or failure of additional
clinical sites to obtain DEA registrations, could delay the manufacturing, distribution and export of anabasum and could delay
the completion of the clinical studies. Furthermore, failure to maintain compliance with the CSA, particularly non-compliance
resulting in loss or diversion, could result in regulatory action that could have a material adverse effect on our business, financial
condition and results of operations. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings
to restrict, suspend or revoke those registrations. In certain circumstances, violations could lead to criminal proceedings. In
addition, if the FDA, DEA, or any foreign regulatory authority determines that anabasum may have potential for abuse, it may require
us to generate more clinical or other data than we currently anticipate to establish whether or to what extent the substance has
an abuse potential, which could increase the cost and/or delay the launch of anabasum.
Individual
states have also established controlled substance laws and regulations. Though state-controlled substances laws often mirror federal
law, because the states are separate jurisdictions, they may separately schedule drugs, as well. While some states automatically
schedule a drug based on federal action, other states schedule drugs through rulemaking or a legislative action. The requirement
for state registrations could also result in delay of the manufacturing and distribution of anabasum or in the completion
of our clinical studies. We and our manufacturing vendors and clinical sites must also obtain separate state registrations, permits
or licenses in order to be able to obtain, handle and distribute controlled substances for clinical trials or commercial sale,
and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the states in addition to those
from the DEA or otherwise arising under federal law.
The
manufacturing and distribution of anabasum is subject to the DEA’s annual manufacturing and procurement quota requirements.
The annual quota allocated to us or our contract manufacturers for the controlled substances in anabasum may not be sufficient
to complete clinical trials. Consequently, any delay or refusal by the DEA in establishing our, or our contract manufacturers’,
procurement and/or production quota for controlled substances could delay or stop our clinical trials or product launches, which
could have a material adverse effect on our business, financial position and operations.
Delays
in shipping anabasum could have a material adverse effect on our business, results of operations and financial condition.
The
import and export of anabasum requires import and export licenses. However, because anabasum is currently a Schedule I controlled
substance in the United States, in addition to the FDA and U.S. Customs and Border Protection, its import and export is also regulated
by the DEA. We may not be granted, or if granted, maintain, such licenses for import or export from the authorities these regulatory
agencies. Even if we obtain the relevant licenses, shipments of anabasum may be held up in transit by any of these authorities,
which could cause significant delays and may lead to product batches which no longer meet specifications for use in clinical trials
or commercial distribution. Such events could result in delayed development timelines, increased expenses and partial or total
loss of revenue from anabasum.
We
expect that we will rely on third parties to assist us in conducting clinical trials for anabasum. 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 anabasum and our business would be substantially harmed.
We
expect to enter into agreements with third-party CROs to assist us in conducting and managing our clinical programs, including
contracting with clinical sites to perform our clinical studies. We plan to rely on these parties for execution of clinical studies
for anabasum and we will control only certain aspects of conducting the clinical studies. Nevertheless, we will be responsible
for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific
standards, and our reliance on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and our CROs
will be required to comply with cGCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of
the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development.
The FDA enforces these cGCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites.
If we or our CROs fail to comply with applicable cGCPs, 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, the FDA will determine that any of our clinical trials
comply with cGCPs. In addition, our clinical trials must be conducted with products produced under cGMP regulations and will require
a large number of test subjects. Our failure or the failure of our CROs or clinical sites to comply with these regulations may
require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement
action up to and including civil and criminal penalties.
Although
we intend to design the clinical trials for anabasum in consultation with CROs, we expect that the CROs will manage all of the
clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development programs would
be outside of our direct control. In addition, the CROs and clinical sites may not perform all of their obligations under arrangements
with us or in compliance with regulatory requirements. If the CROs or clinical sites do not perform clinical trials in a satisfactory
manner, or if they breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization
of anabasum for the subject indication may be delayed or our development program materially and irreversibly harmed. We cannot
control the amount and timing of resources these CROs and clinical sites will devote to our program or anabasum. If we are unable
to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of
our clinical trials, which could significantly delay commercialization and require significantly greater expenditures.
If
any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements
with alternative CROs or clinical sites. If CROs do not successfully carry out their contractual duties or obligations or meet
expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised
due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any such clinical trials
may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize
anabasum. As a result, our financial results and the commercial prospects for anabasum would be harmed, our costs could increase
and our ability to generate revenue could be delayed.
Any
termination or suspension of or delays in the commencement or completion of any necessary studies of anabasum for any indications
could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.
The
commencement and completion of clinical studies can be delayed for a number of reasons, including delays related to:
● the
FDA failing to grant permission to proceed and placing the clinical study on hold;
● subjects
failing to enroll or remain in our trials at the rate we expect;
● a
facility manufacturing anabasum being ordered by the FDA or other government or regulatory authorities to temporarily or permanently
shut down due to violations of cGMP requirements or other applicable requirements, or cross-contaminations of product in the manufacturing
process;
● any
changes to our manufacturing process that may be necessary or desired;
● subjects
choosing an alternative treatment for the indications for which we are developing anabasum, or participating in competing clinical
studies;
● subjects
experiencing severe or unexpected drug-related adverse effects;
● reports
of similar technologies and products raising safety and/or efficacy concerns;
● third-party
clinical investigators losing their license or permits necessary to perform our clinical trials, not performing our clinical trials
on our anticipated schedule or employing methods consistent with the clinical trial protocol, cGCP requirements, or other third
parties not performing data collection and analysis in a timely or accurate manner;
● inspections
of clinical study sites by the FDA or IRBs finding regulatory violations that require us to undertake corrective action, result
in suspension or termination of one or more sites or the imposition of a clinical hold on the entire study, or that prohibit us
from using some or all of the data in support of our marketing applications;
● third-party
contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for
violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use
some or any of the data produced by such contractors in support of our marketing applications;
● one
or more IRBs refusing to approve, suspending or terminating the study at an investigational site precluding enrollment of additional
subjects, or withdrawing its approval of the trial; reaching agreement on acceptable terms with prospective CROs and clinical
trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial
sites;
● deviations
of the clinical sites from trial protocols or dropping out of a trial;
● adding
new clinical trial sites;
● the
inability of the CRO to execute any clinical trials for any reason; and
● government
or regulatory delays or “clinical holds” requiring suspension or termination of a trial.
Product
development costs for anabasum will increase if we have delays in testing or approval or if we need to perform more or larger
clinical studies than planned. Additionally, changes in regulatory requirements and policies may occur and we may need to amend
study protocols to reflect these changes. Amendments may require us to resubmit our study protocols to the FDA and IRBs for reexamination,
which may impact the costs, timing or successful completion of that study. If we experience delays in completion of, or if we,
the FDA or other regulatory authorities, the IRB, or other reviewing entities, or any of our clinical study sites suspend or terminate
any of our clinical studies of anabasum, its commercial prospects may be materially harmed and our ability to generate product
revenues will be delayed. Any delays in completing our clinical trials will increase our costs, slow down our development and
approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm
our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, termination
or suspension of, or a delay in the commencement or completion of, clinical studies may also ultimately lead to the denial of
regulatory approval of anabasum. In addition, if one or more clinical studies are delayed, our competitors may be able to bring
products to market before we do, and the commercial viability of anabasum could be significantly reduced.
We
may not be able to obtain or maintain orphan drug designation or exclusivity for our product candidates.
We
have been granted orphan drug designation in the United States and in the European Union for anabasum for the treatment of cystic
fibrosis and systemic sclerosis. We also intend to seek orphan drug status for anabasum for the treatment of dermatomyositis.
Upon receipt of regulatory approval, orphan drug status will provide us with seven years of market exclusivity in the United States
under the Orphan Drug Act. However, there is no guarantee that the FDA will grant orphan drug designation for anabasum for dermatomyositis
or any other indication, which would make us ineligible for the additional exclusivity and other benefits of orphan drug designation.
Moreover, there can be no assurance that another company also holding orphan drug designation
for the same indication or which may receive orphan drug designation in the future will not receive approval prior to us, in which
case our competitor would have the benefit of the seven years of market exclusivity, and we would be unable to commercialize
our product for the same indication until the expiration of the seven-year period. Even if we are the first to obtain approval
for the orphan drug indication, there are circumstances under which a competing product may be approved for the same indication
during our seven-year period of exclusivity.
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which
is generally a disease or condition that affects fewer than 200,000 individuals in the United States and for which there is no
reasonable expectation that the cost of developing and making a drug available in the Unites States for this type of disease or
condition will be recovered from sales of the product. Orphan drug designation must be requested before submitting an NDA. After
the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly
by the FDA. Orphan designation does not convey any advantage in or shorten the duration of regulatory review and approval process.
In addition to the potential period of exclusivity, orphan designation makes a company eligible for grant funding of up to $400,000
per year for four years to defray costs of clinical trial expenses, tax credits for clinical research expenses and potential exemption
from the FDA application user fee.
If
a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has
such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other applications
to market the same drug for the same indication for seven years, except in limited circumstances, such as (i) the drug’s
orphan designation is revoked; (ii) its marketing approval is withdrawn; (iii) the orphan exclusivity holder consents to the approval
of another applicant’s product; (iv) the orphan exclusivity holder is unable to assure the availability of a sufficient
quantity of drug; or (v) a showing of clinical superiority to the product with orphan exclusivity by a competitor product. If
a drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not
be entitled to orphan drug exclusivity. There can be no assurance that we will receive orphan drug designation for anabasum for
the treatment of dermatomyositis, or other inflammatory disease indications, if we elect to seek such applications.
Any
fast track designation or grant of priority review status by the FDA may not actually lead to a faster development or regulatory
review or approval process, nor will it assure FDA approval of our product candidates. Additionally, our product candidates may
treat indications that do not qualify for priority review vouchers.
We
have received fast track designation for anabasum for the treatment of cystic fibrosis and systemic sclerosis in the United States
and European Union and may seek fast track designation or priority review of applications for approval of our product candidate
for future indications. If a drug is intended for the treatment of a serious or life-threatening condition and the drug
demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA fast track designation.
If a product candidate offers major advances in treatment, the FDA may designate it eligible for priority review. The FDA has
broad discretion whether or not to grant these designations, so even if we believe a particular product candidate is eligible
for these designations, we cannot assure you that the FDA would decide to grant them. Even if we do receive fast track designation
or priority review, we may not experience a faster development process, review or approval compared to conventional FDA procedures.
The FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical
development program.
Any
breakthrough therapy designation granted by the FDA for our product candidate may not lead to a faster development or regulatory
review or approval process, and it does not increase the likelihood that our product candidate will receive marketing approval.
We
have applied for, and may in the future apply for, a breakthrough therapy designation for our product candidate. A breakthrough
therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening
disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing
therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.
For drugs and biologics that have been designated as breakthrough therapies, interaction and communication between the FDA and
the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of
patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA may also be eligible for
accelerated approval if the relevant criteria are met.
Designation
of a product candidate as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe our
product candidate meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not
to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result
in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures
and does not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as breakthrough
therapies, the FDA may later decide that the products no longer meet the conditions for qualification or decide that the time
period for FDA review or approval will not be shortened.
Third-party
coverage and reimbursement and health care cost containment initiatives and treatment guidelines may constrain our future revenues.
Our
ability to successfully market anabasum will depend in part on the level of reimbursement that government health administration
authorities, private health coverage insurers and other organizations provide for the cost of our products and related treatments.
Countries in which anabasum is expected to be sold through reimbursement schemes under national health insurance programs frequently
require that manufacturers and sellers of pharmaceutical products obtain governmental approval of initial prices and any subsequent
price increases. In certain countries, including the United States, government-funded and private medical care plans can exert
significant indirect pressure on prices. We may not be able to sell anabasum profitably if adequate prices are not approved or
coverage and reimbursement is unavailable or limited in scope. Increasingly, third-party payors attempt to contain health care
costs in ways that are likely to impact our development of products including:
● failing
to approve or challenging the prices charged for health care products;
● introducing
reimportation schemes from lower priced jurisdictions;
● limiting
both coverage and the amount of reimbursement for new therapeutic products;
● denying
or limiting coverage for products that are approved by the regulatory agencies but are considered to be experimental or investigational
by third-party payors; and
● refusing
to provide coverage when an approved product is used in a way that has not received regulatory marketing approval.
Risks
Relating to Our Intellectual Property Rights
It
is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights.
Our
commercial success will depend, in part, on maintaining and obtaining additional patent protection for our technologies, products
and processes, successfully defending these patents against third-party challenges and successfully enforcing these patents against
third party competitors. The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal, scientific
and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in interpretations
of patent laws may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that
may be allowable in our pending applications or, the enforceability of our existing and future patents. Our pending patent applications
for anabasum and its uses may never be approved by United States or foreign patent offices and the existing patents and patent
applications relating to anabasum and related technologies may be challenged, invalidated or circumvented by third parties and
may not protect us against competitors with similar products or technologies.
The
degree of our current and future protection for our proprietary rights is uncertain, because legal means afford only limited protection
and may not adequately protect our rights, permit us to gain or keep our competitive advantage, or provide us with any competitive
advantage at all. For example, others have filed, and in the future are likely to file, patent applications covering products
and technologies that are similar, identical or competitive to anabasum, or important to our business. We cannot be certain that
any patents or patent application owned by a third party will not have priority over patents and patent applications filed by
us, or that we will not be involved in interference, opposition or invalidity proceedings before United States or foreign patent
offices.
We
also rely on trade secrets to protect technology, especially in cases when we believe patent protection is not appropriate or
obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators, consultants and
other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other
proprietary or licensed information. Typically, research collaborators and scientific advisors have rights to publish data and
information in which we may have rights. If we cannot maintain the confidentiality of our proprietary technology and other confidential
information, our ability to receive patent protection and our ability to protect valuable information owned by us may be imperiled.
Enforcing a claim that a third-party entity illegally obtained and is using any of our trade secrets is expensive and time consuming,
and the outcome is unpredictable. In addition, courts are sometimes less willing to protect trade secrets than patents. Moreover,
our competitors may independently develop equivalent knowledge, methods and know-how.
If
we fail to maintain or obtain additional patent protection or trade secret protection for anabasum or our technologies, third
parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our
ability to generate revenues and attain profitability.
We
may also rely on the trademarks we may develop to distinguish our products from the products of our competitors. We cannot guarantee
that any trademark applications filed by us or our business partners will be approved. Third parties may also oppose such trademark
applications, or otherwise challenge our use of the trademarks. In the event that the trademarks we use are successfully challenged,
we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources
to advertising and marketing new brands. Further, we cannot provide assurance that competitors will not infringe the trademarks
we use, or that we will have adequate resources to enforce these trademarks.
Anabasum
may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development and
commercialization efforts.
Our
success depends in part on avoiding infringement of the proprietary technologies of others. The pharmaceutical industry has been
characterized by frequent litigation regarding patent and other intellectual property rights. Identification of third party patent
rights that may be relevant to our proprietary technology is difficult because patent searching is imperfect due to differences
in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. Additionally,
because patent applications are maintained in secrecy until the application is published, we may be unaware of third-party patents
that may be infringed by commercialization of anabasum or any future product candidate. There may be certain issued patents and
patent applications claiming subject matter that we may be required to license in order to research, develop or commercialize
anabasum, and we do not know if such patents and patent applications would be available to license on commercially reasonable
terms, or at all. Any claims of patent infringement asserted by third parties would be time-consuming and may:
● result
in costly litigation;
● divert
the time and attention of our technical personnel and management;
● prevent
us from commercializing a product until the asserted patent expires or is held finally invalid or not infringed in a court of
law;
● require
us to cease or modify our use of the technology and/or develop non-infringing technology; or
● require
us to enter into royalty or licensing agreements.
Although
no third party has asserted a claim of infringement against us, others may hold proprietary rights that could prevent anabasum
from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin commercial activities relating
to anabasum or our processes could subject us to potential liability for damages and require us to obtain a license to continue
to manufacture or market anabasum or any future product candidates. We cannot predict whether we would prevail in any such actions
or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In
addition, we cannot be sure that we could redesign anabasum or any future product candidates or processes to avoid infringement,
if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary
licenses, could prevent us from developing and commercializing anabasum or a future product candidate, which could harm our business,
financial condition and operating results.
A
number of companies, including several major pharmaceutical companies, have conducted research on anti-inflammatory and anti-fibrosis
therapies which resulted in the filing of many patent applications related to this research. If we were to challenge the validity
of these or any issued United States patent in court, we would need to overcome a statutory presumption of validity that attaches
to every issued United States patent. This means that, in order to prevail, we would have to present clear and convincing evidence
as to the invalidity of the patent’s claims.
If
we were to challenge the validity of these or any issued United States patent in an administrative trial before the Patent Trial
and Appeal Board in the United States Patent and Trademark Office, we would have to prove that the claims are unpatentable by
a preponderance of the evidence. There is no assurance that a jury and/or court would find in our favor on questions of infringement,
validity or enforceability.
We
may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully
used or disclosed alleged confidential information or trade secrets of their former employers.
As
is commonplace in our industry, we employ individuals who were previously employed at other pharmaceutical companies, including
our competitors or potential competitors. Although no claims against us are currently pending, we may be subject in the future
to claims that our employees or prospective employees are subject to a continuing obligation to their former employers (such as
non-competition or non-solicitation obligations) or claims that our employees or we have inadvertently or otherwise used or disclosed
trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these
claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction
to management.
We
may be subject to claims challenging the inventorship of our patents and other intellectual property.
Although
we are not aware of any asserted third-party claims challenging inventorship on our patents or ownership of our intellectual
property, we may in the future be subject to claims that former employees, strategic partners, commercial counterparties or other
third parties have an interest in our patents or other intellectual property as an inventor or co-inventor. While it is our policy
to require our employees and contractors who may be involved in the conception or development of intellectual property to execute
agreements assigning such intellectual property to us, we cannot fully control the enforcement of these policies by third parties
with which we contract, nor can we be certain that assignment agreements between us and our employees, between us and our counterparties,
or between our counterparties and their employees, will effectively protect our interests as to any party who conceives or develops
intellectual property that we regard as our own. Among other issues, the assignment of intellectual property rights may not be
self-executing, the assignment agreements may be breached, or we may have disputes arise from conflicting obligations of consultants
or others who are involved in developing our product candidates. As we approach potential commercialization of our product candidates,
we are more closely analyzing all facts that we believe might be used to assert an inventorship claim against us. Determinations
like these involve complex sets of fact and applications of sometimes-unsettled patent law, resulting in inherent uncertainties
regarding ownership rights. Determining the history of development of certain of our intellectual property is made more difficult
by the fact that certain of our intellectual property was developed by other companies for other indications before being
acquired by us. Consequently, we cannot be sure that we have all of the documentary records relevant to such an analysis.
If
claims challenging inventorship are made against us, we may need to resort to litigation to resolve those claims. If we fail in
defending against any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights,
such as exclusive ownership of valuable intellectual property rights or the right to assert those rights against third-parties
marketing competing products. Even if we are successful in defending against such claims, litigation could result in substantial
costs and be a distraction to management and other employees.
General
Company-Related Risks
We
will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As
of January 4, 2018, we had 48 full-time employees. As our development and commercialization plans and strategies
develop, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial and other
resources. Future growth would impose significant added responsibilities on members of management, including the need to identify,
recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate
amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities.
Our future financial performance and our ability to commercialize anabasum and any other future product candidates and our ability
to compete effectively will depend, in part, on our ability to effectively manage our future growth.
Future
capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.
If
we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership will be reduced
and these stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences
and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities
would have rights senior to those of our common stock and the terms of the debt securities issued could impose significant restrictions
on our operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or candidate products, or to grant licenses on terms that are
not favorable to us.
If
we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our
business strategy. In addition, the loss of the services of certain key employees, including Yuval Cohen, our Chief Executive
Officer, Mark Tepper, our President and Chief Scientific Officer, Barbara White, our Chief Medical Officer and Sean Moran,
our Chief Financial Officer would adversely impact our business prospects.
Our
ability to compete in the highly competitive pharmaceuticals industry depends in large part upon our ability to attract highly
qualified managerial, scientific and medical personnel. In order to induce valuable employees to remain with us, we intend to
provide employees with stock options that vest over time. The value to employees of stock options that vest over time will be
significantly affected by movements in the price of our common stock that we will not be able to control and may at any
time be insufficient to counteract more lucrative offers from other companies.
Our
management team has expertise in many different aspects of drug development and commercialization. However, we will need to hire
additional personnel as we further develop anabasum. Competition for skilled personnel in our market is intense and competition
for experienced scientists may limit our ability to hire and retain highly qualified personnel on acceptable terms. Despite our
efforts to retain valuable employees, members of our management, scientific and medical teams may terminate their employment with
us on short notice. In connection with the merger in April 2014 with Corbus Pharmaceuticals, Inc., our wholly-owned subsidiary,
we entered into employment agreements with certain of our executive officers. However, these employment arrangements provide for
at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. The
loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results
or financial condition. In particular, we believe that the loss of the services of Yuval Cohen, Ph.D., our Chief Executive Officer,
Mark Tepper, Ph.D., our President and Chief Scientific Officer, Barbara White, M.D., our Chief Medical Officer and Sean Moran,
C.P.A., M.B.A., our Chief Financial Officer, would have a material adverse effect on our business. Our success also depends on
our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior,
mid-level, and senior scientific and medical personnel.
Other
pharmaceutical companies with which we compete for qualified personnel have greater financial and other resources, different risk
profiles, and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances
for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer.
If we are unable to continue to attract and retain high-quality personnel, the rate and success at which we can develop and commercialize
product candidates would be limited.
If
product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization
of anabasum.
We
face a potential risk of product liability as a result of the clinical testing of anabasum and will face an even greater risk
if we commercialize anabasum or any other future product. For example, we may be sued if any product we develop, including anabasum,
or any materials that we use in our products allegedly causes injury or is found to be otherwise unsuitable during product testing,
manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects
in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims
could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit commercialization of anabasum. Even successful defense would
require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result
in:
● decreased
demand for anabasum or any future products that we may develop;
● injury
to our reputation;
● withdrawal
of clinical trial participants;
● costs
to defend the related litigation;
● a
diversion of management’s time and our resources;
● substantial
monetary awards to trial participants or patients;
● product
recalls, withdrawals or labeling, marketing or promotional restrictions;
● the
inability to commercialize anabasum; and
● a
decline in the value of our stock.
Our
inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of products we develop. We intend to obtain product liability
insurance covering our clinical trials. Although we will maintain such insurance, any claim that may be brought against us could
result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in
excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to
a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a
settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain,
sufficient capital to pay such amounts.
We
may acquire businesses, assets or products, or form strategic alliances, in the future, and we may not realize the benefits of
such acquisitions.
We
may acquire additional businesses, assets or products, form strategic alliances or create joint ventures with third parties that
we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies,
we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our
existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any
new delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following
any such acquisition, we will achieve the expected synergies to justify the transaction.
Risks
Related to our Common Stock
Our
affiliates may control our company for the foreseeable future, including the outcome of matters requiring stockholder approval.
Our
officers, directors, and five percent stockholders collectively owned approximately 12.6% of our outstanding shares of common
stock as of January 4, 2018. This concentration of voting power and control could have a significant effect in delaying,
deferring or preventing an action that might otherwise be beneficial to our other stockholders and be disadvantageous to our stockholders
with interests different from those entities and individuals. Certain of these individuals also have significant control over
our business, policies and affairs as officers or directors of our company. Therefore, you should not invest in reliance on your
ability to have any control over our company.
An
active, liquid trading market for our common stock may not be sustained.
Presently,
our common stock is traded on the Nasdaq Global Market, or Nasdaq, and as we are in our early stages, an investment in
our company may require a long-term commitment, with no certainty of return. If we are unable to maintain an active, liquid active
trading market:
● investors
may have difficulty buying and selling or obtaining market quotations;
● market
visibility for shares of our common stock may be limited; and
● a
lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of our common stock.
The
lack of an active market could impair your ability to sell your shares at the time you wish to sell them or at a price that you
consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may
also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire
additional intellectual property assets by using our shares as consideration.
We
are currently listed on the Nasdaq Global Market. If we are unable to maintain listing of our securities on the Nasdaq Global
Market or any stock exchange, our stock price could be adversely affected and the liquidity of our stock and our ability to obtain
financing could be impaired and it may be more difficult for our stockholders to sell their securities.
Although
our common stock is currently listed on the Nasdaq Global Market, we may not be able to continue to meet the exchange’s
minimum listing requirements or those of any other national exchange. If we are unable to maintain listing on Nasdaq or if a liquid
market for our common stock does not develop or is sustained, our common stock may remain thinly traded.
The
Listing Rules of Nasdaq require listing issuers to comply with certain standards in order to remain listed on its exchange. If,
for any reason, we should fail to maintain compliance with these listing standards and Nasdaq should delist our securities from
trading on its exchange and we are unable to obtain listing on another national securities exchange, a reduction in some or all
of the following may occur, each of which could have a material adverse effect on our stockholders:
● the
liquidity of our common stock;
● the
market price of our common stock;
● our
ability to obtain financing for the continuation of our operations;
● the
number of institutional and general investors that will consider investing in our common stock;
● the
number of investors in general that will consider investing in our common stock;
● the
number of market makers in our common stock;
● the
availability of information concerning the trading prices and volume of our common stock; and
● the
number of broker-dealers willing to execute trades in shares of our common stock.
The
market price of our common stock may be significantly volatile.
Even
if an active market for our common stock develops, of which no assurances can be given, the market price for our common stock
may be volatile and subject to wide fluctuations in response to factors including the following:
● actual
or anticipated fluctuations in our quarterly or annual operating results;
● changes
in financial or operational estimates or projections;
● conditions
in markets generally;
● changes
in the economic performance or market valuations of companies similar to ours; and
● general
economic or political conditions in the United States or elsewhere.
In
particular, the market prices of biotechnology companies like ours have been highly volatile due to factors, including, but not
limited to:
● any
delay or failure to conduct a clinical trial for our product or receive approval from the FDA and other regulatory agencies;
● developments
or disputes concerning a company’s intellectual property rights;
● technological
innovations of such companies or their competitors;
● changes
in market valuations of similar companies;
● announcements
by such companies or their competitors of significant contracts, acquisitions, strategic partnerships, joint ventures,
capital commitments, new technologies, or patents; and
● failure
to complete significant transactions or collaborate with vendors in manufacturing a product.
The
securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also materially and adversely affect the market price of shares
of our common stock.
Future
sales of shares by existing stockholders could cause our stock price to decline.
As
of September 30, 2017, we had outstanding options to purchase an aggregate of 7,724,779 shares of our common stock at a weighted
average exercise price of $3.66 per share and warrants to purchase an aggregate of 1,288,500 shares of our common stock at a weighted
average exercise price of $1.00 per share. The exercise of such outstanding options and warrants will result in further dilution
of your investment. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the
public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even
if there is no relationship between such sales and the performance of our business.
We
do not currently intend to pay dividends on our common stock in the foreseeable future, 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 declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of our
common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of
our common stock will appreciate in value or even maintain the price at which our investors have purchased their shares.
We
are an “emerging growth company,” and will be able take advantage of reduced disclosure requirements applicable to
“emerging growth companies,” which could make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and,
for as long as we continue to be an “emerging growth company,” we intend to take advantage of certain exemptions from
various reporting requirements applicable to other public companies but not to “emerging growth companies,” including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We will remain an emerging growth company until the earlier of (1) January 1, 2020, (2) the
last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (3) the date on which we become a “large
accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if
the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most
recently completed second fiscal quarter or (4) the date on which we have issued more than $1 billion in non-convertible debt
during the preceding three-year period.
We
intend to take advantage of these reporting exemptions described above until we are no longer an “emerging growth company.”
Under the JOBS Act, “emerging growth companies” can also delay adopting new or revised accounting standards until
such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption
from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as
other public companies that are not “emerging growth companies.”
We
cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors
find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading
market for our common stock and our stock price may be more volatile.
We
will incur significantly increased costs and devote substantial management time as a result of operating as a public company,
particularly after we are no longer an “emerging growth company.”
As
a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. For example,
we are required to comply with certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and
Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, including the establishment and
maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance
with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming
and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and
other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant
expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act. In addition, after we are no longer qualify as an “emerging growth company,” we expect to incur additional management
time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers
or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act. We currently do not have an internal audit function, and we will need to hire or contract for additional accounting and financial
staff with appropriate public company experience and technical accounting knowledge.
We
cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing
of such costs.
There
may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud
may materially harm our company.
Proper
systems of internal controls over financial accounting and disclosure are critical to the operation of a public company. As of
January 4, 2018, we had 48 full-time employees, which results in a lack of segregation of duties, and we may be
unable to effectively establish such systems, especially in light of the fact that we expect to operate as a publicly reporting
company. This would leave us without the ability to reliably assimilate and compile financial information about our company and
significantly impair our ability to prevent error and detect fraud, all of which would have a negative impact on our company from
many perspectives.
Moreover,
we do not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Failure of our control systems to detect or prevent error or fraud could materially adversely impact us.
We
may be unable to complete our analysis of our internal controls over financial reporting in a timely manner, or these internal
controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result,
the value of our common stock.
We
are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by our management on, among other things,
the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material
weaknesses identified by our management in our internal control over financial reporting.
We
may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and
testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable
to assert that our internal controls are effective.
If
we are unable to assert that our internal control over financial reporting is effective, or, if applicable, our independent registered
public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence
in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we
may be subject to investigation or sanctions by the SEC. We will also be required to disclose changes made in our internal control
and procedures on a quarterly basis.
Our
remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting in the future.
Any of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our company, which
could have a negative impact on our stock price.
Upon
dissolution of our company, you may not recoup all or any portion of your investment.
In
the event of a liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, the proceeds and/or assets
of our company remaining after giving effect to such transaction, and the payment of all of our debts and liabilities and distributions
required to be made to holders of any outstanding preferred stock will then be distributed to the stockholders of common stock
on a pro rata basis. There can be no assurance that we will have available assets to pay to the holders of common stock, or any
amounts, upon such a liquidation, dissolution or winding-up of our Company. In this event, you could lose some or all of your
investment.
Our
ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As
a result of our merger in April 2014 with Corbus Pharmaceuticals, Inc., our wholly-owned subsidiary, our ability to utilize our
federal net operating loss, carryforwards and federal tax credit prior to that date may be limited under Sections 382 of the Internal
Revenue Code. The limitations apply if an “ownership change,” as defined by Section 382, occurs. Generally, an ownership
change occurs if the percentage of the value of the stock that is owned by one or more direct or indirect “five percent
shareholders” increases by more than 50 percentage points over their lowest ownership percentage at any time during the
applicable testing period (typically three years). In addition, future changes in our stock ownership, which may be outside of
our control, may trigger an “ownership change” and, consequently, Section 382 limitations. As a result, if we earn
net taxable income, our ability to use our pre-change net operating loss carryforwards and other tax attributes to offset United
States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability
to us.
Our
certificate of incorporation, as amended, allows for our board to create new series of preferred stock without further approval
by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. We anticipate
that our board of directors will have the authority to issue up to 10,000,000 shares of our preferred stock without further stockholder
approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to
holders the preferred right to our assets upon liquidation and the right to receive dividend payments before dividends are distributed
to the holders of common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock
that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative
voting power of our common stock or result in dilution to our existing stockholders.
Additional
Risks Relating to The Offering
You
may experience immediate and substantial dilution in the book value per share of the common stock you purchase.
Because
the price per share of our common stock being offered may be higher than the book value per share of our common stock, you may
suffer substantial dilution in the net tangible book value of the common stock you purchase in this offering. See the section
entitled “Dilution” below for a more detailed discussion of the dilution you will incur if you purchase common stock
in this offering. In addition, we have a significant number of options and restricted stock outstanding. If the holders of these
securities exercise them or become vested in them, as applicable, you may incur further dilution.
Sales
of a significant number of shares of our common stock in the public markets, or the perception that such sales could occur, could
depress the market price of our common stock.
Sales
of a substantial number of shares of our common stock in the public markets, or the perception that such sales could occur, could
depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
We have agreed, without the prior written consent of Cantor Fitzgerald & Co. and subject to certain exceptions set forth in
the sales agreement, not to sell or otherwise dispose of any common stock or securities convertible into or exchangeable for shares
of common stock, warrants or any rights to purchase or acquire common stock during the period beginning on the fifth trading day
immediately prior to the delivery of any placement notice delivered by us to Cantor Fitzgerald & Co. and ending on the fifth
trading day immediately following the final settlement date with respect to the shares sold pursuant to such notice. We have further
agreed, subject to certain exceptions set forth in the sales agreement, not to sell or otherwise dispose of any common stock or
securities convertible into or exchangeable for shares of common stock, warrants or any rights to purchase or acquire common stock
in any other “at-the-market” or continuous equity transaction prior to the termination of the sales agreement with
Cantor Fitzgerald & Co. Therefore, it is possible that we could issue and sell additional shares of our common stock in the
public markets. We cannot predict the effect that future sales of our common stock would have on the market price of our common
stock.
Our
share price has been and could remain volatile.
The
market price of our common stock has historically experienced and may continue to experience significant volatility. From January
2015 through January 11, 2018, the market price of our common stock has fluctuated from a high of $10.78 per share in the
fourth quarter of 2016, to a low of $1.01 per share in the first quarter of 2016. Our progress in developing and commercializing
our products, the impact of government regulations on our products and industry, the potential sale of a large volume of our common
stock by stockholders, our quarterly operating results, changes in general conditions in the economy or the financial markets
and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially
with significant market losses. If our stockholders sell a substantial number of shares of common stock, especially if those sales
are made during a short period of time, those sales could adversely affect the market price of our common stock and could impair
our ability to raise capital. In addition, in recent years, the stock market has experienced significant price and volume fluctuations.
This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating
performance and may adversely affect the price of our common stock. In addition, we could be subject to a securities class action
litigation as a result of volatility in the price of our stock, which could result in substantial costs and diversion of management’s
attention and resources and could harm our stock price, business, prospects, results of operations and financial condition.
Our
management team may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not
yield a significant return.
Our
management will have broad discretion over the use of proceeds from this offering. The net proceeds from this offering will be
used to fund our continued development of anabasum and for general corporate purposes, which may include funding preclinical studies,
clinical trials, the manufacturing of anabasum for clinical trials and commercial launch, and acquisitions or investments in businesses,
products or technologies that are complementary, and to increase our working capital and fund capital expenditures. We may also
use a portion of the net proceeds to in-license, acquire or invest in complementary businesses or products; however, we have no
current commitments or obligations to do so.
Our
management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as
part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for
corporate purposes that do not increase our operating results or enhance the value of our common stock. Pending their use, we
may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments
may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways
that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
Future
sales of shares by existing stockholders could cause our stock price to decline.
Sales
of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception
in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price
of our common stock.
As
of September 30, 2017, we had outstanding options to purchase an aggregate of 7,724,779 shares of our common stock at a weighted
average exercise price of $3.66 per share and warrants to purchase an aggregate of 1,288,500 shares of our common stock at a weighted
average exercise price of $1.00 per share. The exercise of such outstanding options and warrants will result in further dilution
of your investment. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the
public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even
if there is no relationship between such sales and the performance of our business.