Item 1A. Risk Factors.
Investing in our securities
involves a high degree of risk. The following risk factors and other information included in this Quarterly Report on Form 10-Q
and in our Annual Report on Form 10-K for the year ended December 31, 2017 should be carefully considered before deciding whether
to invest in shares of our common stock or the Convertible Notes. The risks and uncertainties described below and in our other
filings are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less
significant may also impair our business operations. If any of the following risks, or such unknown risks, occur, our business,
financial condition, results of operations and future growth prospects could be materially and adversely affected. In that case,
the market price of our securities could decline, and you may lose all or part of your investment.
Risks Related to Our Financial Position and
Need for Additional Capital
We are currently dependent on the successful
commercialization of Ocaliva for PBC. To the extent Ocaliva is not commercially successful, our business, financial condition and
results of operations may be materially adversely affected and the price of our common stock may decline
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Ocaliva is our only drug
that has been approved for sale and it has only been approved for the treatment of PBC in combination with ursodeoxycholic acid
(or ursodiol) in adults with an inadequate response to ursodiol or as monotherapy in adults unable to tolerate ursodiol.
Our ability to generate
profits from operations and become profitable currently depends on the commercial success of Ocaliva for PBC. However, the successful
commercialization of Ocaliva for PBC is subject to many risks. We have not launched or commercialized a drug before, and there
is no guarantee that we will be able to do so successfully. There are numerous examples of unsuccessful product launches and commercial
efforts, as well as failures to meet expectations of market potential, including by pharmaceutical companies with greater experience
and resources than us.
The commercial
success of Ocaliva for PBC depends on the extent to which patients, physicians and payers accept and adopt Ocaliva as a
treatment for PBC, and we do not know whether our or others’ estimates in this regard will be accurate. As such, there
is significant uncertainty in the degree of market acceptance that Ocaliva will have for PBC. For example, if the patient
population suffering from PBC is smaller than we estimate, or even if the patient population matches our estimates but
Ocaliva is not widely accepted as a treatment for PBC, the commercial potential of Ocaliva for PBC will be limited.
Physicians may not prescribe Ocaliva and patients may be unwilling to use Ocaliva if coverage is not provided or
reimbursement is inadequate to cover a significant portion of the cost. Additionally, the use of Ocaliva in a non-trial
setting may result in the occurrence of unexpected or a greater incidence of side effects, adverse reactions or misuse that
may negatively affect the commercial prospects of Ocaliva for PBC. Furthermore, any negative development in any other
development program for OCA or our failure to satisfy the post-marketing regulatory commitments and requirements to which we
are or may become subject, including the completion of our Phase 4 COBALT trial, may materially and adversely impact the
commercial results and potential of Ocaliva for PBC. See “—Risks Related to the Commercialization of
Our Products” and “—Risks Related to the Development and the Regulatory Review and Approval of Our
Products and Product Candidates” below.
As a result, it is uncertain
whether Ocaliva net sales for PBC will in the future sustain our operations and it may take a significant amount of time before
Ocaliva net sales for PBC sustain our operations even if Ocaliva becomes accepted as a therapy for PBC. Furthermore, Ocaliva may
not receive regulatory approval for PBC in jurisdictions beyond those in which it is currently approved, which may also limit our
prospects. If the commercialization of Ocaliva for PBC is unsuccessful or perceived to be unsuccessful, the long-term prospects
of Ocaliva for PBC, as well as the long-term prospects of our company, may be materially and adversely affected.
We have never been profitable. We expect to incur losses
for the foreseeable future, and we may never achieve or sustain profitability.
We have never been profitable
and do not expect to be profitable in the foreseeable future. We incurred net losses of $360.4 million, $412.8 million and $226.4
million for the years ended December 31, 2017, 2016 and 2015, respectively, and $156.8 million and $176.5 million for the six months
ended June 31, 2018 and 2017, respectively. To date, we have financed our operations primarily through public and private securities
offerings, sales of product and payments received under our licensing and collaboration agreements. At June 30, 2018, we had $538.3
million in cash, cash equivalents and investment securities.
We have devoted substantially
all of our resources to the development of our product candidates, including the conduct of our clinical trials, the launch and
commercialization of Ocaliva for PBC, preparation for the potential launch of OCA for NASH and general and administrative operations,
including the protection of our intellectual property.
We expect to continue
to incur losses for the foreseeable future, and we expect these losses to be significant as we, among other things, continue to
commercialize Ocaliva for PBC, develop and seek regulatory approvals for OCA for NASH and other indications, and build-out the
infrastructure in the United States and internationally necessary to support our product development and commercialization efforts
and operations as a public company. We believe our prospects and ability to significantly grow revenues will be dependent on our
ability to successfully develop and commercialize OCA for indications other than PBC, such as NASH and PSC. As a result, we expect
a significant amount of resources to continue to be devoted to our development programs for OCA.
As part of our product
development activities, we anticipate that we will continue our Phase 4 COBALT trial of OCA for PBC, our Phase 3 clinical program
of OCA for NASH, including our Phase 3 REGENERATE trial in non-cirrhotic NASH patients with liver fibrosis and our Phase 3 REVERSE
trial for NASH patients with compensated cirrhosis, and the development of OCA for PSC. We also expect to continue the development
of OCA for additional diseases, such as biliary atresia, a rare pediatric disease characterized by deficient bile duct development.
Our overall development program for OCA for NASH is expected to include a number of trials, including clinical trials required
to submit a New Drug Application (“NDA”) for NASH. Our expenses could increase if we are required by the FDA or the
European Medicines Agency (“EMA”) to perform studies or trials in addition to those currently expected, or if there
are any delays in completing our clinical trials or the development of any of our product candidates.
If OCA or any of our other
product candidates fails in clinical trials or does not gain regulatory approval, or if OCA or any of our other product candidates
does not achieve market acceptance, we may never become profitable. Our net losses and negative cash flows have had, and will continue
to have, an adverse effect on our stockholders’ equity and working capital. Because of the numerous risks and uncertainties
associated with pharmaceutical product development and commercialization, we are unable to predict with certainty the timing or
amount of our expenses, whether such expenses may increase, or when, or if, we will be able to achieve profitability. The amount
of our future net losses will depend, in part, on our future expenses, whether and by how much such expenses increase and our ability
to generate revenues.
We will require substantial additional
funding, which may not be available to us on acceptable terms, if at all. If adequate funds are not available to us, we may be
required to delay, limit, reduce or cease our operations.
We are currently advancing
OCA through clinical development for multiple indications, including NASH, and other product candidates through various stages
of clinical and preclinical development. Developing pharmaceutical products, including conducting preclinical studies and clinical
trials, is expensive. If, for example, the FDA requires that we perform additional studies beyond those that we currently expect,
our expenses could increase materially beyond what we currently anticipate, and the timing of any potential product approval may
be delayed.
In addition, we have incurred
and anticipate that we will continue to incur significant product sales, marketing, manufacturing and distribution expenses relating
to the commercialization of Ocaliva for PBC. As part of our longer-term strategy, we anticipate that we will incur significant
expenses in connection with our research and development efforts, the commercialization of our approved products other than Ocaliva
for PBC, the build-out of our general and administrative infrastructure in the United States and abroad and our operations as a
public company. We may also engage in business development activities that involve potential in- or out-licensing of products or
technologies or acquisitions of other products, technologies or businesses.
As of June 30, 2018, we
had $538.3 million in cash, cash equivalents and investment securities. We currently expect to incur significant operating expenses
in the fiscal year ending December 31, 2018. These expenses are planned to support, among other initiatives, the continued commercialization
of Ocaliva for PBC in the United States and our other markets, our continued clinical development of OCA for PBC and NASH and our
other earlier stage research programs. Although we believe that our existing capital resources, together with our net sales of
Ocaliva for PBC, will be sufficient to fund our anticipated operating requirements for the next twelve months, we may need to raise
additional capital to fund our operating requirements beyond that period. Furthermore, in light of the numerous risks and uncertainties
associated with pharmaceutical product development and commercialization, any delays in, or unanticipated costs associated with,
our development, regulatory or commercialization efforts could significantly increase the amount of capital required by us to fund
our operating requirements. Accordingly, we may seek to access the public or private capital markets whenever conditions are favorable,
even if we do not have an immediate need for additional capital at that time. Our forecast regarding the period of time through
which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and
uncertainties, and actual results, including the costs to maintain our currently planned operations, could vary materially.
Our forecasts regarding the period of time that
our existing capital resources will be sufficient to meet our operating requirements and the timing of our future funding requirements,
both near and long-term, will depend on a variety of factors, many of which are outside of our control. Such factors include, but
are not limited to:
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our ability to successfully commercialize Ocaliva for PBC;
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our ability to maintain our regulatory approval of Ocaliva for PBC in the United States, Europe,
Canada, Israel, Australia and other jurisdictions in which we have or may receive marketing authorization;
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the initiation, timing, cost, conduct, progress and results of our research and development activities,
preclinical studies and clinical trials, including any issues, delays or failures in identifying patients, enrolling patients,
treating patients or completing and timely reporting the results of our NASH or PBC clinical trials;
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our ability to timely and cost-effectively obtain regulatory approval of our product candidates,
including OCA for NASH;
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conditions that may be imposed by regulatory authorities on our marketing approvals for our products
and product candidates, such as the need for clinical outcomes data (and not just results based on achievement of a surrogate endpoint),
and any related restrictions, limitations and/or warnings contained in the label of any of our products or product candidates;
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any potential side effects associated with Ocaliva for PBC or our product candidates that could
delay or prevent approval, require that an approved product be taken off the market, require the inclusion of safety warnings or
precautions or otherwise limit the sale of such product or product candidate;
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our ability to maintain our relationships with, and the performance of, third-party vendors upon
whom we are substantially dependent, including contract research organizations for our clinical trials and our third-party suppliers
and manufacturers;
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our ability to identify, develop and commercialize our products and product candidates;
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our ability to obtain and maintain intellectual property protection for our products and product
candidates;
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our ability to successfully commercialize our product candidates, if approved;
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the size and growth of the markets for our products and product candidates and our ability to serve
those markets;
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the degree of market acceptance of Ocaliva for PBC and, if approved, our product candidates, which
may be affected by the ability of patients and healthcare providers to obtain coverage or reimbursement from payors for our products
and the extent to which such coverage or reimbursement is provided;
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our ability to establish and maintain an effective sales and marketing infrastructure directly
or through collaborations with third parties;
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competition from existing drugs or new drugs that become available;
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our ability to prevent system failures, data breaches or violations of data protection laws;
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costs and outcomes relating to any securities, intellectual property, employment, product liability
or other litigation;
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our collaborators’ election to pursue research, development and commercialization activities;
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our ability to attract and maintain collaborators with development, regulatory and commercialization
expertise;
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our need for and ability to obtain additional financing;
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our estimates regarding expenses, revenues and capital requirements and the accuracy thereof;
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our use of cash and short-term investments;
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our ability to acquire, license and invest in businesses, technologies, product candidates and
products;
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our ability to attract and retain key personnel to manage our business effectively;
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our ability to manage the growth of our operations, infrastructure, personnel, systems and controls;
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our ability to obtain and maintain adequate insurance coverage; and
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the other risks and uncertainties identified under the captions “Risk Factors” and
“Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly
Report on Form 10-Q and in our other periodic filings filed with the SEC, including our Annual Report on Form 10-K for the year
ended December 31, 2017.
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We have no committed external
sources of funding and additional funds may not be available when we need them on terms that are acceptable to us, or at all. If
adequate funds are not available to us, we may not be able to make scheduled debt payments on a timely basis, or at all, and may
be required to delay, limit, reduce or cease our operations.
Raising additional capital may
cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Unless and until we generate
sufficient cash flow from sales of our products, including Ocaliva for PBC and, if approved, OCA for NASH, we expect to finance
our future cash needs through public or private equity offerings, debt financings, government or other third-party funding, marketing
and distribution arrangements or other collaborations, strategic alliances and licensing arrangements, or a combination of these
sources. Additional funding may not be available to us on acceptable terms, if at all.
The terms of any future
financing may adversely affect the interests of our existing securityholders. For example, to the extent that we raise additional
capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted,
and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.
Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or declaring dividends. We also could be required to seek
funds through arrangements with licensing or collaborative partners or otherwise that may require us to relinquish rights to some
of our technologies or product candidates or otherwise agree to terms unfavorable to us. If we are unable to raise additional funds
through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development
or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to
develop and market ourselves.
We have a limited operating history
as a commercial organization, which may make it difficult to predict our future performance, and we expect to continue to face
a number of factors that may cause operating results to fluctuate.
We are a biopharmaceutical
company with a limited operating history as a commercial organization. Prior to the launch and commercialization of Ocaliva for
PBC, our operations were limited to developing our technology, undertaking preclinical studies and clinical trials of our product
candidates and preparing for the commercial launch of Ocaliva for PBC. Other than Ocaliva for PBC, none of our other product candidates
have received regulatory approval. Consequently, any predictions regarding our future success or viability may not be as accurate
as they could be if we had a longer operating history or greater experience commercializing approved products.
The commercialization
of Ocaliva for an orphan disease such as PBC is, and will continue to be, expensive and time-consuming, and we cannot be certain
that we will be able to generate sufficient revenues from sales of Ocaliva for PBC in our target markets to offset such costs.
Furthermore, our financial condition and operating results have varied significantly in the past and are expected to continue to
significantly fluctuate from quarter-to-quarter and year-to-year due to a variety of factors, many of which are outside of our
control. Such factors include, but are not limited to:
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our ability to successfully commercialize Ocaliva for PBC;
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our ability to maintain our regulatory approval of Ocaliva for PBC in the United States, Europe,
Canada, Israel, Australia and other jurisdictions in which we have or may receive marketing authorization;
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the initiation, timing, cost, conduct, progress and results of our research and development activities,
preclinical studies and clinical trials, including any issues, delays or failures in identifying patients, enrolling patients,
treating patients or completing and timely reporting the results of our NASH or PBC clinical trials;
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our ability to timely and cost-effectively obtain regulatory approval of our product candidates,
including OCA for NASH;
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conditions that may be imposed by regulatory authorities on our marketing approvals for our products
and product candidates, such as the need for clinical outcomes data (and not just results based on achievement of a surrogate endpoint),
and any related restrictions, limitations and/or warnings contained in the label of any of our products or product candidates;
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any potential side effects associated with Ocaliva for PBC or our product candidates that could
delay or prevent approval, require that an approved product be taken off the market, require the inclusion of safety warnings or
precautions or otherwise limit the sale of such product or product candidate;
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our ability to maintain our relationships with, and the performance of, third-party vendors upon
whom we are substantially dependent, including contract research organizations for our clinical trials and our third-party suppliers
and manufacturers;
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our ability to identify, develop and commercialize our products and product candidates;
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our ability to obtain and maintain intellectual property protection for our products and product
candidates;
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our ability to successfully commercialize our product candidates, if approved;
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the size and growth of the markets for our products and product candidates and our ability to serve
those markets;
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the degree of market acceptance of Ocaliva for PBC and, if approved, our product candidates, which
may be affected by the ability of patients and healthcare providers to obtain coverage or reimbursement from payors for our products
and the extent to which such coverage or reimbursement is provided;
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our ability to establish and maintain an effective sales and marketing infrastructure directly
or through collaborations with third parties;
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competition from existing drugs or new drugs that become available;
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our ability to prevent system failures, data breaches or violations of data protection laws;
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costs and outcomes relating to any securities, intellectual property, employment, product liability
or other litigation;
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our collaborators’ election to pursue research, development and commercialization activities;
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our ability to attract and maintain collaborators with development, regulatory and commercialization
expertise;
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our need for and ability to obtain additional financing;
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our estimates regarding expenses, revenues and capital requirements and the accuracy thereof;
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our use of cash and short-term investments;
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our ability to acquire, license and invest in businesses, technologies, product candidates and
products;
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our ability to attract and retain key personnel to manage our business effectively;
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our ability to manage the growth of our operations, infrastructure, personnel, systems and controls;
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our ability to obtain and maintain adequate insurance coverage; and
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the other risks and uncertainties identified under the captions "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q
and in our other periodic filings filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31,
2017.
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Risks Related to the Development
and the Regulatory Review and
Approval of Our Products
and Product Candidates
We cannot be certain whether Ocaliva will
receive full approval for PBC in jurisdictions where it has previously received accelerated or conditional approval, or that Ocaliva
will be approved for PBC in any jurisdictions beyond those in which it is currently approved. Furthermore, OCA may not be approved
for NASH or any other indication beyond PBC and we may not receive regulatory approval for any other product candidate. Without
regulatory approval, we will not be able to market and commercialize our product candidates.
The development, testing,
manufacture, labeling, packaging, storage, approval, promotion, advertising, distribution, marketing and export and import, among
other things, of our products and product candidates are subject to extensive regulation by the FDA in the United States, the EMA
in Europe and various regulatory authorities in other countries, with regulations differing from country to country. We are not
permitted to market our product candidates in the United States or Europe until we receive approval of an NDA, from the FDA, or
a Marketing Authorization Application (“MAA”), from the EMA, respectively. Currently, our ability to generate product
sales depends on the successful marketing of Ocaliva for PBC in the jurisdictions in which it has received regulatory approval.
In the future, our ability to generate product sales in addition to those of Ocaliva for PBC will depend on whether we are successful
in obtaining regulatory approval of our other product candidates, including OCA for NASH.
Ocaliva is our only drug
that has been approved for sale and it has only been approved for the treatment of PBC in combination with ursodiol in adults with
an inadequate response to ursodiol or as monotherapy in adults unable to tolerate ursodiol. In the United States, Ocaliva was approved
for PBC under the accelerated approval pathway. Accelerated approval was granted for OCA for PBC based on a reduction in alkaline
phosphatase (“ALP”); however, an improvement in survival or disease-related symptoms has not yet been established.
Continued approval of Ocaliva for PBC in the United States may be contingent upon the verification and description of clinical
benefit in confirmatory trials. Our Phase 4 COBALT confirmatory outcomes trial may fail to show a clinical benefit for OCA for
PBC or may not satisfy applicable regulatory requirements for other reasons. As specified by the applicable post-marketing requirements,
our COBALT trial includes subjects across the spectrum of PBC disease, including early and advanced PBC. We have agreed to evaluate
the safety and efficacy of Ocaliva in patients with moderate to severe hepatic impairment and as a monotherapy in patients with
PBC. Finally, we have agreed to develop and characterize a lower dose formulation of Ocaliva to allow for once daily dosing in
patients with moderate or advanced hepatic impairment.
We commenced our commercial
launch of Ocaliva for PBC in certain European countries in 2017 following the European Commission’s grant of conditional
approval in December 2016. Our marketing authorization in the European Union is conditioned on the completion of the COBALT trial
and a trial evaluating the safety and efficacy of Ocaliva in patients with moderate to severe hepatic impairment.
Since January 2017, Ocaliva
has also received regulatory approval in several of our target markets outside the United States and Europe, including Canada,
Israel and Australia, and we are pursuing marketing approval of Ocaliva for PBC in certain other international markets. If
obtained, continued approval of Ocaliva for PBC in such jurisdictions may be contingent upon the verification and description of
clinical benefit in confirmatory trials.
Other than Ocaliva for
PBC, we currently have no products approved for sale and we cannot guarantee that we will ever have additional marketable products
or that our products will be approved for use in additional indications such as NASH. NDAs and MAAs must include extensive preclinical
and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired
indication. NDAs and MAAs must also include significant information regarding the chemistry, manufacturing and controls for the
product. Obtaining approval of an NDA or an MAA is a lengthy, expensive and uncertain process, and we may not be successful in
obtaining approval. The FDA and the EMA review processes can take years to complete and approval is never guaranteed. Even after
the submission of an NDA to the FDA, the FDA must decide whether to accept or reject the submission for filing. In addition, in
June 2016, eligible members of the electorate in the United Kingdom decided by referendum to leave the European Union, in what
is often referred to as Brexit. Since a significant proportion of the regulatory framework in the United Kingdom is derived from
European Union directives and regulations, the referendum could materially change the regulatory regime applicable to our operations,
including with respect to Ocaliva for PBC or our product candidates.
Approvals may also be
conditional upon the completion of one or more clinical trials. In addition, delays in approvals or rejections of marketing applications
in the United States, Europe or other countries may be based upon many factors, including regulatory requests for additional analyses,
reports, data, preclinical studies and clinical trials, regulatory questions regarding safety, different interpretations of data
and results, changes in regulatory policy during the period of product development and the emergence of new information regarding
our product candidates or approved products. Regulatory approval is also dependent on successfully passing regulatory inspection
requirements applicable to our company, clinical sites and key vendors, including requirements that we and such parties comply
with applicable good clinical, laboratory and manufacturing practices regulations. Critical findings could jeopardize or delay
the approval of our NDAs or MAAs.
Prior to receiving regulatory
approval, we must finalize the product label for each of our product candidates in each jurisdiction in which we seek regulatory
approval. Even if our product is approved, the FDA, EMA or other applicable regulatory authority may limit the indications or uses
for which our product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming
clinical trials, risk mitigation programs or reporting as a condition of approval. Also, regulatory approval for our approved products
may be withdrawn. Obtaining regulatory approval for the marketing of our product in one country does not ensure that we will be
able to obtain regulatory approval for such product in any other country.
In order to obtain regulatory
approval for OCA for indications other than PBC, we will need to complete a number of additional clinical trials and studies. For
example, in connection with our Phase 3 clinical program of OCA for NASH, we are currently conducting our Phase 3 REGENERATE trial
in non-cirrhotic NASH patients with liver fibrosis and our Phase 3 REVERSE trial for NASH patients with compensated cirrhosis.
We may also conduct additional trials in NASH. Our ability to obtain the regulatory approvals necessary to commercialize OCA for
indications other than PBC, including NASH, will depend on our ability to successfully conduct and complete these trials, as well
as our ability to prepare and submit complex regulatory filings in accordance with applicable regulatory requirements.
There can be no assurance
that OCA will receive marketing approval for PBC in jurisdictions where it has not yet been approved or for NASH in any jurisdiction,
or that any of our other product candidates will receive marketing approval for any indication in any jurisdiction. We cannot predict
whether our clinical trials and studies for our product candidates, including OCA for PBC, NASH or any other indication, will be
successful, whether regulatory authorities will agree with our conclusions relating to the clinical trials and studies we conduct,
or whether such regulatory authorities will require us to conduct additional clinical trials or studies. For example, while OCA
received breakthrough therapy designation from the FDA in January 2015 for the treatment of NASH patients with liver fibrosis,
we do not know if one pivotal clinical trial will be sufficient for marketing approval in the United States or if the FDA will
approve OCA for NASH patients with liver fibrosis on an accelerated basis, or at all. The design of our Phase 3 REGENERATE trial
differs in important ways from the Phase 2b clinical trial for the treatment of NASH, known as the FLINT trial, sponsored by the
U.S. National Institute of Diabetes and Digestive and Kidney Diseases (“NIDDK”), a part of the National Institutes
of Health. For example, the primary endpoint for the interim analysis for our Phase 3 REGENERATE trial may be achieved based on:
(i) the proportion of OCA-treated patients relative to placebo achieving at least one stage of liver fibrosis improvement with
no worsening of NASH or (ii) the proportion of OCA-treated patients relative to placebo achieving NASH resolution with no worsening
of liver fibrosis. Furthermore, we selected a definition for NASH resolution that defines a responder as a patient achieving a
histologic score of 0 for ballooning and 0 or 1 for inflammation. Our Phase 3 REGENERATE trial will also remain blinded after the
interim analysis and continue to follow patients until the occurrence of a pre-specified number of adverse liver-related clinical
events, including progression to cirrhosis, to confirm clinical benefit on a post-marketing basis, if approved.
Furthermore, the Phase
2 dose ranging trial of OCA in 200 adult NASH patients in Japan conducted by our collaborator, Sumitomo Dainippon, did not meet
statistical significance for the primary endpoint. In this trial, there was a dose dependent, although not statistically significant,
increase in the percentage of OCA treated patients compared to placebo who achieved the primary endpoint (p=0.053). In addition,
no difference was seen in fibrosis improvement in the OCA groups compared to placebo. The baseline characteristics between the
patients in the Japanese Phase 2 dose ranging trial conducted by Sumitomo Dainippon were distinct in a number of ways from those
of the Western patients included in the Phase 2b FLINT trial conducted by NIDDK. For example, differences were observed among the
patient population at baseline in relation to gender mix and metabolic factors like weight, diabetes status, dyslipidemia and hypertension.
While our Phase 3 REGENERATE trial was designed based on the results of the FLINT trial and is anticipated to enroll a predominantly
Western NASH patient population, the results of the Phase 2b FLINT trial may not be replicated in our Phase 3 REGENERATE trial.
There is no assurance that Sumitomo Dainippon will initiate any registrational trials in NASH and the results of any additional
trial conducted by Sumitomo Dainippon may not result in an improvement when compared to the results of its Phase 2 dose ranging
trial in Japanese NASH patients.
If we are unable to obtain
regulatory approval for OCA for PBC in the jurisdictions in which it is not currently approved or obtain regulatory approval for
our other product candidates, including OCA for NASH, in any jurisdiction, we will may not be able to generate sufficient revenue
to become profitable or to continue our operations.
We are developing product
candidates for the treatment of rare diseases or diseases for which there are no or limited therapies, such as PBC, NASH and PSC,
and for some of which there is little clinical experience, and our development approach involves new endpoints and methodologies.
As a result, there is a heightened risk that we will not be able to gain agreement with regulatory authorities regarding an acceptable
development plan, the outcome of our clinical trials will not be favorable or that, even if favorable, regulatory authorities may
not find the results of our clinical trials to be sufficient for marketing approval.
We are focused on developing
therapeutics for the treatment of rare diseases and diseases for which there are no or limited treatments. As a result, the design
and conduct of our clinical trials for these indications is subject to heightened risk.
In the United States,
the FDA generally requires two adequate and well-controlled pivotal clinical trials to approve an NDA. Furthermore, for full approval
of an NDA, the FDA requires a demonstration of efficacy based on a clinical benefit endpoint. The FDA may grant accelerated approval
based on a surrogate endpoint reasonably likely to predict clinical benefit. Even if the results of our pivotal clinical trials
for a specific indication, such as our Phase 3 REGENERATE trial of OCA for non-cirrhotic NASH patients with liver fibrosis, are
highly significant and reasonably believed by us to be likely to predict clinical benefit, the FDA may not accept the results of
such trials or approve our product candidate on an accelerated basis, or at all. It is also possible that any NDA we submit for
regulatory approval in the United States will not be accepted by the FDA for review and, even if accepted for review, there may
be delays in the FDA’s review process and the FDA may determine that such NDA does not merit the approval of the product
candidate. In such a case, the FDA may require that we conduct and/or complete additional clinical trials and preclinical studies
before it will reconsider our application for approval.
Even if we receive accelerated
approval for any of our product candidates, we may be required to conduct a post-approval clinical outcomes trial to confirm the
clinical benefit of such product candidates by demonstrating the correlation of the surrogate endpoint therapeutic response in
patients with a significant reduction in adverse clinical outcomes over time. For example, we received accelerated approval for
OCA for PBC in the United States, but must also conduct a clinical outcomes study with respect to OCA for PBC. Following discussions
with regulatory authorities, we initiated our COBALT clinical outcomes confirmatory trial for PBC in December 2014 prior to the
approval of Ocaliva for PBC. The COBALT trial includes subjects across the spectrum of PBC disease, including early and advanced
PBC. We have agreed to evaluate the safety and efficacy of Ocaliva in patients with moderate to severe hepatic impairment and as
a monotherapy in patients with PBC. There can be no assurance that our COBALT trial or other trials conducted as part of our post-marketing
obligations will confirm that the surrogate endpoint used for accelerated approval of Ocaliva for PBC will eventually show an adequate
correlation with clinical outcomes. If any such trial fails to show such adequate correlation, we may not be able to maintain our
previously granted marketing approval of Ocaliva for PBC. Similarly, continued approval of any other product candidates approved
based on a surrogate endpoint may be contingent upon the verification and description of clinical benefit in confirmatory trials.
Our marketing authorization
in the European Union for Ocaliva for the treatment of PBC is not a full approval. Instead, it is conditional on the conduct of
certain post-approval studies. Our ability to maintain conditional marketing authorization of Ocaliva for PBC in the European Union
is limited to specific circumstances and subject to several conditions and obligations that we may be unable to satisfy in whole
or at all, including the completion of one or more clinical outcomes trials to confirm the clinical benefit of Ocaliva for PBC.
Conditional marketing authorizations based on incomplete clinical data may be granted for a limited number of listed medicinal
products for human use, including products designated as orphan medicinal products under European Union law, if (i) the risk-benefit
balance of the product is positive, (ii) it is likely that the applicant will be in a position to provide the required comprehensive
clinical trial data, (iii) unmet medical needs will be fulfilled and (iv) the benefit to public health of the immediate availability
on the market of the medicinal product outweighs the risk inherent in the fact that additional data are still required. Specific
obligations, including obligations relating to the successful completion of ongoing or new studies and the collection of pharmacovigilance
data, may be specified in the conditional marketing authorization. Conditional marketing authorizations are valid for one year,
and may be renewed annually, if the risk-benefit balance remains positive, and after an assessment of the need for additional or
modified conditions.
Our ongoing Phase 3 REGENERATE
trial of OCA for non-cirrhotic NASH patients with liver fibrosis incorporates an interim primary surrogate endpoint that may serve
as the basis for a regulatory submission for accelerated approval in the United States and approval in Europe. Accelerated approval
in the United States and conditional approval in the European Union for OCA for NASH are subject to similar risks as discussed
above in relation to OCA for PBC. The primary endpoint in the Phase 2b FLINT trial of OCA for NASH patients was based on liver
biopsy data and was defined as an improvement of two or more points in the Nonalcoholic Fatty Liver Disease Activity Score (“NAS”),
with no worsening of liver fibrosis. In contrast, the primary endpoint for the interim analysis for our Phase 3 REGENERATE trial
may be achieved based on: (i) the proportion of OCA-treated patients relative to placebo achieving at least one stage of liver
fibrosis improvement with no worsening of NASH or (ii) the proportion of OCA-treated patients relative to placebo achieving NASH
resolution with no worsening of liver fibrosis. Furthermore, we selected a definition for NASH resolution for the trial that defines
a responder as a patient achieving a histologic score of 0 for ballooning and 0 or 1 for inflammation. We do not know if one pivotal
clinical trial will be sufficient for marketing approval in the United States or if the FDA will approve OCA for NASH patients
with liver fibrosis on an accelerated basis, or at all.
It is possible that if
we seek marketing approval of OCA for non-cirrhotic NASH patients with liver fibrosis based on the interim results of our Phase
3 REGENERATE trial, our regulatory submission may not be accepted by the FDA for review and, even if accepted for review, there
may be delays in the FDA’s review process or the FDA may determine that our submission does not merit the approval of OCA
for the treatment of non-cirrhotic NASH patients. The FDA may also require that we continue our Phase 3 REGENERATE trial until
completion to assess the potential benefits of OCA treatment on liver-related and other clinical outcomes. Our regulatory pathway
for OCA for the treatment of NASH will depend upon our discussions with the FDA and EMA. As a result, we may face difficulty in
designing an acceptable registration strategy with respect to our Phase 3 REGENERATE trial, as well as other trials we may conduct
in other subpopulations of NASH patients. In addition, since the design of our Phase 3 REGENERATE trial deviates from that of the
FLINT trial, there is a heightened risk that the results of our Phase 3 REGENERATE trial may differ from the results of the FLINT
trial.
If we continue the development
of OCA for PSC, we may seek marketing approval based on a surrogate endpoint. Neither the FDA nor the EMA has validated a surrogate
endpoint as a basis for seeking approval in PSC and any surrogate endpoint we select may ultimately not be accepted by the FDA,
EMA or other applicable regulatory authorities.
Prior to any approval
of OCA for PBC in jurisdictions in which it is not currently approved or our other product candidates, including OCA for NASH,
the FDA, EMA or other applicable regulatory authorities may require additional preclinical studies and/or clinical trials, which
may be expensive and time consuming to conduct and complete. Consequently, any such requirement that we conduct additional preclinical
studies or clinical trials could materially and adversely affect our business, financial condition and results of operations. Furthermore,
even if we receive such approval, the relevant labeling may include restrictions, limitations and/or warnings that could impact
the commercial success of OCA or other product candidate in the applicable markets.
Delays or difficulties
in the commencement, enrollment and completion of our clinical trials and studies could increase our product development costs
and delay, limit or prevent us from obtaining regulatory approval for OCA and our other product candidates.
Delays or difficulties
in the commencement, enrollment and completion of our clinical trials and studies could increase our product development costs
and limit or prevent us from obtaining regulatory approval for OCA and our other product candidates. We are currently conducting
a number of clinical trials, including our Phase 4 COBALT clinical outcomes confirmatory trial of OCA for PBC, our Phase 3 REGENERATE
trial of OCA for non-cirrhotic NASH patients with liver fibrosis and our REVERSE trial of OCA for NASH patients with compensated
cirrhosis. The results from these clinical trials and our other clinical trials and studies may not be available when we expect
and we may be required to conduct additional clinical trials or studies not currently planned in order for our product candidates,
including OCA for PBC, NASH and PSC, to be approved. In addition, our clinical programs are subject to a number of risks and uncertainties,
such as the results of other trials, patient enrollment, safety issues or regulatory interactions that result in a change of trial
design or timing. Consequently, we do not know whether our current or future clinical trials or studies in OCA or our other product
candidates will begin or be completed on schedule, if at all.
The commencement, enrollment
and completion of our clinical trials and studies may be delayed or suspended for a variety of reasons, including:
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our inability to obtain sufficient funds to complete or continue our clinical trials;
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our inability to reach agreements on acceptable terms with prospective contract research organizations
(“CROs”) and trial sites, the terms of which may be subject to extensive negotiation and may vary significantly among
our various CROs and trial sites;
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clinical holds, other regulatory objections to our commencing or continuing a clinical trial or
our inability to obtain regulatory approval to commence clinical trials in countries that require such approvals;
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our discussions with the FDA or non-U.S. regulatory authorities, including discussions subsequent
to the initiation of our clinical trials, regarding, among other matters, the scope or design of our clinical trials;
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our inability to identify and maintain a sufficient number of trial sites, many of which may already
be engaged in other clinical trial programs, including some that may be for the same indications targeted by our product candidates;
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any delay in receiving results from, or failure to achieve the necessary results in, other clinical
trials;
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our inability to obtain approval from institutional review boards to conduct a clinical trial at
their respective sites;
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severe or unexpected drug-related adverse events experienced by patients or any determination that
a clinical trial presents unacceptable health risks;
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any breach of the terms of any relevant agreement by us, our current or future collaborators that
have responsibility for the clinical development of any of our product candidates, including Sumitomo Dainippon, or investigators
conducting clinical trials on our product candidates;
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our inability to timely manufacture sufficient quantities of our product candidate required for
our clinical trials; and
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any difficulty recruiting, enrolling or retaining patients in our clinical trials based on, among
other factors, the enrollment criteria for our clinical trials, the rarity of the disease, the characteristics of the population
being studied, the risks of the procedures that may be required as part of the clinical trials, such as a liver biopsy, or competition
from other clinical trial programs recruiting patients for the same indications as our product candidates.
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For example, our Phase
3 REGENERATE trial is a large and complicated clinical trial in a disease without any approved therapies and involves serial liver
biopsies over many years. While we completed enrollment of the interim analysis cohort in 2017, there can be no assurance that
we will retain a sufficient number of patients or complete the interim analysis and trial on a timely basis. As we engage in other
large and complicated trials and trials in advanced disease populations, we may experience a number of complications that may negatively
delay or otherwise affect our plans and development programs.
Additionally, we have
in the past occasionally experienced difficulties retaining patients after enrollment in our clinical trials. Difficulty retaining
patients may delay our clinical trials or result in negative or inconclusive outcomes, and we or our collaborators may decide,
or regulatory authorities may require us, to conduct additional clinical trials or preclinical studies. Any delay or compromises
with respect to the validity of our clinical trials may have a material adverse effect on our business or decrease our competitive
position relative to other biotechnology or pharmaceutical companies with whom we compete.
In addition, if we or
any of our collaborators are required to conduct additional clinical trials or other preclinical studies of our product candidates
beyond those contemplated, our ability to obtain regulatory approval of these product candidates and generate revenue from their
sales would be similarly harmed.
Clinical failure can
occur at any stage of clinical development. The results of earlier clinical trials are not necessarily predictive of future results
and any product candidate we or our collaborators advance through clinical trials may not have favorable results in later clinical
trials or receive regulatory approval.
Clinical failure can occur
at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or our collaborators
may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained
from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we
do, which may delay, limit or prevent regulatory approval. Success in preclinical studies and early clinical trials does not ensure
that subsequent clinical trials will generate the same or similar results or otherwise provide adequate data to demonstrate the
efficacy and safety of our product candidates. A number of companies in the pharmaceutical industry, including those with greater
resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials and at other stages of clinical
development, even after seeing promising results in earlier clinical trials.
In addition, the design
of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical
trial may not become apparent until the clinical trial is well-advanced. We may be unable to design and execute a clinical trial
to support regulatory approval. Further, clinical trials of product candidates often reveal that it is not practical or feasible
to continue development efforts. If OCA or our other product candidates are found to be unsafe or lack efficacy for any indication,
we will not be able to obtain regulatory approval for them, and our prospects and business may be materially and adversely affected.
In some instances, there
may be significant variability in safety and/or efficacy results between different trials of the same product candidate due to
numerous factors, including changes or differences in trial protocols, differences in composition of the patient populations, differences
in adherence to the dosing regimen and other trial protocols and differences in the rate of dropout among clinical trial participants.
We do not know whether any Phase 2, Phase 3 or other clinical trials we or any of our collaborators may conduct will demonstrate
consistent or adequate efficacy and safety or be approved by regulatory authorities. If we are unable to bring any of our current
or future product candidates to market, or to acquire any previously approved products, our ability to create long-term stockholder
value will be limited.
Although Ocaliva for PBC
has received accelerated approval in the United States and conditional approval in the European Union, its full approval depends
on the results of post-marketing clinical trials, including our Phase 4 COBALT trial. We cannot assure you that these trials will
demonstrate a correlation of the surrogate endpoint therapeutic response in patients taking Ocaliva for PBC with a significant
reduction in adverse clinical outcomes over time.
In December 2014, we received
comprehensive datasets from the Phase 2b FLINT trial for the treatment of NASH, which met its primary endpoint with statistical
significance. In October 2015, we announced that the Phase 2 dose ranging trial of OCA in 200 adult NASH patients in Japan conducted
by our collaborator, Sumitomo Dainippon, did not meet its primary endpoint with statistical significance. In the Sumitomo Dainippon
trial, there was a dose dependent, although not statistically significant, increase in the percentage of OCA treated patients compared
to placebo who achieved the primary endpoint (p=0.053). In addition, no difference was seen in fibrosis improvement in the OCA
groups compared to placebo. The Sumitomo Dainippon Phase 2 trial involved different doses of OCA being administered to the trial
subjects than those utilized in the Phase 2b FLINT trial. Furthermore, the baseline characteristics between the patients in the
Japanese Phase 2 dose ranging trial conducted by Sumitomo Dainippon were distinct in a number of ways from those of the Western
patients included in the Phase 2b FLINT trial. While our Phase 3 REGENERATE trial is anticipated to enroll a predominantly Western
NASH patient population, the results of the Phase 2b FLINT trial may not be replicated in our Phase 3 REGENERATE trial. In addition,
since the design of our Phase 3 REGENERATE trial deviates in certain ways from that of the Phase 2b FLINT trial, there is a risk
that the results of our Phase 3 REGENERATE trial will differ from the results of the Phase 2b FLINT trial. Even though OCA has
been granted breakthrough therapy designation by the FDA, we do not know if one pivotal clinical trial will be sufficient for marketing
approval or if regulatory authorities in the United States, Europe or our other target markets will approve OCA for NASH patients
with liver fibrosis on an accelerated or conditional basis, or at all. As a result, it may take longer than anticipated to initiate
and complete our Phase 3 REGENERATE trial or our Phase 3 program in NASH for other patient subpopulations.
Our product candidates
may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require that our
products be taken off the market or include new or additional safety warnings. Any such events may limit our existing and future
product sales and materially and adversely affect our business, financial condition and results of operations.
OCA has been shown to
be a potent farnesoid X receptor (“FXR”) agonist. With the exception of the endogenous human bile acid chenodeoxycholic
acid and cholic acid, there are no approved FXR agonists and the adverse effects from long-term exposure to this drug class are
unknown. Unforeseen side effects from any of our product candidates could arise either during clinical development or, if approved,
after the approved product has been marketed.
The most common side effects
observed in clinical trials of OCA for PBC were pruritus, or itching, fatigue, headaches, nausea, constipation and diarrhea. In
our Phase 3 POISE trial, pruritus, generally mild to moderate, was the most frequently reported adverse event associated with OCA
treatment for PBC and was observed in 38% of patients on placebo, 70% of patients in the 10 mg OCA group and 56% of patients in
the OCA titration group (5 mg to 10 mg). Eight patients discontinued due to pruritus, of whom none were in the placebo group, seven
(10%) were in the 10 mg OCA group and one (1%) was in the OCA titration group. Pruritus also has been observed in other clinical
trials of OCA. Decreases in HDL cholesterol were also observed during treatment in our Phase 3 POISE trial. In our Phase 2 trials
for OCA for PBC, a dose-response relationship was observed in the occurrence of liver-related adverse reactions, including jaundice,
ascites and primary biliary cholangitis flare with dosages of OCA of 10 mg once daily to 50 mg once daily (up to 5-times the highest
recommended dosage), as early as one month after starting treatment with OCA. The European label for Ocaliva also notes that elevations
in alanine amino transferase and aspartate aminotransferase were observed in patients treated with OCA.
In the course of our post-marketing
pharmacovigilance activities, deaths have been reported in PBC patients with moderate or severe hepatic impairment. In an analysis
performed by us and in consultation with the FDA, we concluded that certain of these patients were prescribed once daily doses
of Ocaliva, which is seven times higher than the recommended weekly dose in such patients. As a result, in September 2017, we issued
a Dear Health Care Provider (“DHCP”) letter, and the FDA also subsequently issued its own safety communication to reinforce
recommended label dosing. Both communications remind healthcare providers of the importance of the recommended reduced dosing of
Ocaliva in PBC patients with moderate or severe hepatic impairment, while reiterating the importance of monitoring PBC patients
for progression of their disease and the occurrence of liver-related adverse reactions. In addition to the DHCP letter, we have
taken actions to enhance education about appropriate use of Ocaliva. These initiatives include: reeducating physicians on the label,
with a focus on ensuring appropriate dosing for patients with moderate or severe hepatic impairment; enhancing monitoring of patients
for liver-related adverse reactions; and completing adjudication of all reported cases of serious liver injury, including in patients
with no or mild hepatic impairment. In February 2018, we announced that the Ocaliva label in the United States had been updated
by the FDA to include a boxed warning and a dosing table that reinforce the existing dosing schedule for patients with Child-Pugh
Class B or C or decompensated cirrhosis. In addition, the FDA issued an updated drug safety communication to accompany the revised
label. We remain focused on the safety of all of the patients using Ocaliva within and outside of our ongoing clinical studies
and have engaged with relevant regulatory authorities, including the EMA, to ensure that the Ocaliva label in all applicable jurisdictions
sufficiently reinforces the importance of appropriate dosing in patients with advanced cirrhosis. These events and any safety concerns
associated with Ocaliva, perceived or real, may adversely affect the successful development and commercialization of our product
candidates and lead to a loss of revenues.
Ocaliva is contraindicated
for PBC patients with complete biliary obstruction in the United States and the European Union. For PBC patients with HDL reductions
and no response to Ocaliva after one year at the maximum tolerated dose, the U.S. label asks prescribing physicians to weigh the
risks against the benefits of continuing treatment.
With respect to OCA for
NASH, based on information in the manuscript for the Phase 2b FLINT trial published in November 2014, pruritus occurred more frequently
in the OCA treatment group than in the placebo treatment group (23% vs. 6%, p < 0.001) and at a higher grade (predominately
moderate pruritus). In the Phase 2b FLINT trial, OCA treatment was associated with changes in serum lipid levels, including increases
in total cholesterol and LDL cholesterol and a decrease in HDL cholesterol, that were observed within 12 weeks of initiating treatment,
peaked and then decreased in magnitude while on treatment, and reversed further during the 24-week post-treatment period. As previously
disclosed, these changes in cholesterol levels, along with the achievement of pre-defined efficacy criteria, played a role in the
decision of the FLINT data and safety monitoring board to terminate the treatment phase of the Phase 2b FLINT trial, and the publication
of the FLINT results has noted the need for further study of these changes. There were two patient deaths in the Phase 2b FLINT
trial, and neither death was considered related to OCA treatment.
In December 2015, we initiated
our Phase 2 clinical trial, known as our CONTROL trial, to characterize the lipid metabolic effects of OCA and cholesterol management
effects of concomitant statin administration in NASH patients. CONTROL enrolled 80 NASH patients who were naïve to statin
therapy or had undergone a statin washout period. The study included a 16-week double-blind phase followed by an optional two-year
long-term safety extension (“LTSE”) phase of the trial. In our Phase 2 CONTROL trial, OCA treatment in the absence
of statin therapy over the first four weeks resulted in an increase in LDL across all OCA treatment groups, while the placebo group
was relatively unchanged. Treatment with atorvastatin beginning at week four and continuing through week 16 reversed OCA-related
increases in LDL to below baseline levels in all OCA treatment groups. Dose-dependent pruritus was the most common adverse event
in patients treated with OCA, occurring in 5% of patients on placebo, 5% of patients in the 5 mg OCA group, 10% of patients in
the 10 mg OCA group and 55% of patients in the 25 mg OCA group. All events were mild to moderate and two patients discontinued
treatment in the 25 mg OCA group due to pruritus. Over 95% of the patients completing the double-blind phase of CONTROL enrolled
in the LTSE phase of the trial.
During the LTSE phase
of CONTROL, there has been one patient death. This patient was a 64 year-old male with a history of NASH associated liver cirrhosis,
morbid obesity (BMI >40) and type 2 diabetes. At baseline, this patient had blood tests consistent with impaired liver function
(e.g., low LDL and low platelets). The patient was randomized to placebo for the double-blind phase of the study. Early in the
double-blind phase, the patient had serum biochemistry changes consistent with worsening hepatic impairment (e.g., albumin decline
and bilirubin was increasing). Atorvastatin was started per protocol and then stopped early due to the patient’s persistently
low LDL levels. The patient later enrolled in the LTSE phase and began receiving 25 mg OCA treatment. Over the following four months,
the patient’s serum biochemistry remained consistent with ongoing hepatic impairment. Approximately five months after starting
the LTSE phase, the patient developed severe protracted diarrhea, which resulted in weight loss of 30 pounds over the ensuing one-month
period. Both an infectious cause and possible inflammatory bowel disease were suspected, and the patient subsequently was started
on broad spectrum antibiotics and steroid therapy. Due to the diarrhea, the principal investigator stopped treatment with OCA and
discontinued the patient from the study. Concurrently, the patient reported jaundice and was found to have significantly elevated
serum bilirubin and ALP, while other liver enzymes remained relatively stable. Over the ensuing two-week period, various diagnostic
tests and procedures were performed (e.g., magnetic resonance cholangiopancreatography to investigate possible gallstone bile duct
obstruction) and the patient continued receiving a number of other medications, including the ongoing course of steroid therapy.
During this time, the patient continued to deteriorate and was hospitalized with acute renal and liver failure, complicated by
severe metabolic acidosis. The patient rapidly progressed to multi-organ system failure, sepsis and death.
The principal investigator
determined that the events leading to the patient’s death were unlikely related to OCA. Despite the numerous confounding
factors in this case, given the contemporaneous administration of OCA during the patient’s ongoing deterioration, we determined
that it could not be ruled out that these events were possibly related to treatment. Subsequent to our determination, the independent
data safety monitoring committee separately evaluated the case and determined that the events leading to the patient’s death
were unlikely related to OCA
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In our Phase 2 AESOP trial
of OCA for PSC, pruritus was the most common adverse event, occurring
in 46% of patients
on placebo, 60% of patients in the 1.5 mg to 3 mg OCA group and 67% of patients in the 5 mg to 10 mg OCA group, with the severity
increasing with dose. One (4%) patient in the 1.5 mg to 3 mg OCA group and three (12%) patients in the 5 mg to 10 mg OCA group
discontinued OCA due to pruritus compared to none in the placebo group.
Additional or unforeseen
side effects relating to OCA or any of our other product candidates could arise either during clinical development or, if approved,
after the approved product has been marketed. With the approval of Ocaliva for PBC in the United States, Europe and certain of
our other target markets, OCA will be used in an environment that is less rigorously controlled than in clinical studies. If new
side effects are found, if known side effects are shown to be more severe than previously observed or if OCA is shown to have other
unexpected characteristics, we may need to abandon our development of OCA for PBC, NASH, PSC and other potential indications. Furthermore,
our commercial sales of Ocaliva for PBC may be materially and adversely affected.
The range and potential
severity of possible side effects from systemic therapies is significant. The results of future clinical trials may show that our
product candidates cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result
in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval
from the FDA and other regulatory authorities with restrictive label warnings.
In addition, our product
candidates are being developed as potential treatments for severe, life threatening diseases and, as a result, our trials will
necessarily be conducted in patient populations that will be more prone than the general population to exhibit certain disease
states or adverse events. For example, our Phase 3 REVERSE trial in NASH patients with compensated cirrhosis has expanded our NASH
development program into advanced patient populations in NASH and accordingly imposes certain eligibility requirements for uptitration,
as well as certain monitoring requirements thereafter. Ocaliva is prescribed in patients suffering from various
stages of PBC, which can be life threatening, and patients may suffer from other concomitant illnesses that may increase the likelihood
of certain adverse events. It may be difficult to discern whether certain events or symptoms observed during our clinical trials
or by patients using our approved products are related to our product candidates or approved products or some other factor. As
a result, we and our development programs may be negatively affected even if such events or symptoms are ultimately determined
to be unlikely related to our product candidates or approved products. We further cannot assure you that additional or more severe
adverse side effects related to OCA or our other product candidates will not be observed in our future clinical trials or commercial
use, which could delay or preclude regulatory approval of OCA or limit its commercial use.
If we or others later
identify undesirable or unacceptable side effects caused by our product candidates or products:
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we may be required to modify or include additional dosage and administration instructions, warnings
and precautions, contraindications, boxed warnings, limitations, restrictions or other statements in the product label for our
approved products, or issue field alerts to physicians and pharmacies;
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we may be required to conduct costly additional clinical trials;
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we may be subject to limitations on how we may promote our approved products;
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sales of our approved products may decrease significantly;
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regulatory authorities may require us to take our approved products off the market;
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we may be subject to litigation or product liability claims; and
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our reputation may suffer.
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Breakthrough therapy
designation for OCA may not lead to faster development or regulatory processes nor does it increase the likelihood that OCA will
receive marketing approval for NASH.
If a drug is intended
for the treatment of a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate
substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment
effects observed early in clinical development, the FDA may grant a breakthrough therapy designation. Breakthrough therapy designation
is intended to facilitate the development, and expedite the review, of such drugs, but the breakthrough therapy designation does
not assure marketing approval by the FDA.
In January 2015, we received
breakthrough therapy designation for OCA for the treatment of NASH patients with fibrosis. However, there is no guarantee that
the receipt of breakthrough therapy designation will result in a faster development process, review or approval of OCA for fibrotic
NASH patients or increase the likelihood that OCA will be granted marketing approval for fibrotic NASH patients. Similarly, any
future breakthrough therapy designation relating to any other potential indication of OCA neither guarantees a faster development
process, review or approval nor improves the likelihood of the grant of marketing approval by the FDA for any such potential indication
of OCA compared to conventional FDA procedures. In addition, the FDA may withdraw any breakthrough therapy designation at any time.
While we may seek breakthrough therapy designation for one or more of our other product candidates, we can give no assurance that
the FDA will grant such status.
We may not be able
to obtain or, if approved, maintain orphan drug exclusivity for our approved products or product candidates, which could cause
our revenues to suffer.
Regulatory authorities
in some jurisdictions, including the United States and Europe, may designate drugs and biologics for relatively small patient populations
as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug or biologic intended
to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually
in the United States. OCA has received orphan drug designation in the United States and the European Union for the treatment of
PBC and PSC.
Generally, if a product
with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation,
the product is entitled to a period of marketing exclusivity, which precludes the FDA or the EMA from approving another marketing
application for the same product during the exclusivity period. The applicable exclusivity period is seven years in the United
States and ten years in Europe. The European exclusivity period can be reduced to six years if a product no longer meets the criteria
for orphan drug designation or if the product is sufficiently profitable that market exclusivity is no longer justified.
Orphan drug exclusivity
may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable
to assure a sufficient quantity of the product to meet the needs of patients with the rare disease or condition. In addition, in
Europe, it is possible that orphan marketing exclusivity attaching to the marketing authorization will be reduced to six years
if, at the end of the fifth year following the receipt of marketing authorization, the EMA and the Committee for Orphan Medicinal
Products determine that the product does not satisfy the requisite criteria including demonstration of significant clinical benefit
(having regard to requirements set out in the applicable EU regulations and guidance) where it is shown based on the available
evidence that the product is sufficiently profitable to justify not maintaining the marketing exclusivity.
Any failure to maintain
orphan drug status may subject us to mandatory price discounts in Europe and result in the loss of other benefits, such as tax
exemptions for sales. As such, the loss of orphan drug status may have a negative effect on our ability to successfully commercialize
our products, earn revenues and achieve profitability.
Even if we obtain orphan
drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different products
can be approved for the same condition. Even after an orphan drug is approved, the FDA or EMA may subsequently approve another
product for the same condition if the FDA or EMA concludes that the later product is clinically superior (i.e., it is shown to
be safer, more effective or makes a major contribution to patient care). Any inability to secure or maintain orphan drug status
or the exclusivity benefits of this status could have a material adverse impact on our ability to develop and commercialize our
product candidates and approved products.
We rely entirely on
third parties for the manufacture of our product requirements for our preclinical studies, clinical trials and commercial supply
of OCA and other product candidates, and also depend on third-party vendors and CROs for certain of our clinical trial and product
development activities. Our business could be harmed if our third-party manufacturers fail to provide us with sufficient quantities
of drug product, or fail to do so at acceptable quality levels or prices, or we lose our relationships with our third-party vendors
and CROs and our clinical trial or product development efforts are delayed as a result.
We do not manufacture
or intend to manufacture the pharmaceutical products that we sell or plan to sell. We currently have agreements with a contract
manufacturer for the production of active pharmaceutical ingredient and finished drug product for our commercial sales and for
our clinical trials and preclinical studies that we are conducting and plan to conduct. Any inability by our contract manufacturer
to continue to provide services to us for any reason could adversely affect our commercialization efforts and clinical development
program, and we may be unable to identify, qualify and engage on terms that are favorable to us one or more replacement suppliers
on a timely basis, if at all.
We currently
have a long-term supply agreement with PharmaZell GmbH for the manufacture and commercial supply of Ocaliva. While we have procured
sufficient supplies for the initial commercialization of Ocaliva for PBC, we may not be able to procure sufficient supplies of
Ocaliva on an ongoing basis. We are also seeking to qualify one or more back-up suppliers, but we may not be able to enter into
additional long-term commercial supply agreements for OCA with other third-party manufacturers on acceptable terms, or at all.
We do not have agreements for long-term supplies of any of our other product candidates. We currently obtain supplies and services
relating to our other product candidates from our third-party contract manufacturers on a purchase order basis.
The facilities
used by any contract manufacturer to manufacture OCA or any of our other product candidates must be the subject of a satisfactory
inspection before the FDA or regulators in other jurisdictions approve the product candidate manufactured at that facility. We
are completely dependent on these third-party manufacturers for compliance with the requirements of U.S. and non-U.S. regulators
for the manufacture of our finished products. If our manufacturers are unable to meet our requirements in accordance with our product
specifications and applicable current good manufacturing practice (“cGMP”) requirements, our products or product candidates
will not be approved or, if already approved, may be subject to recall.
Reliance on
third-party manufacturers entails risks to which we would not be subject if we manufactured our product candidates and products
ourselves, including:
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the possibility that we are unable to enter into or renew our manufacturing agreements with third parties on acceptable terms,
or at all;
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the possible termination or breach by our third-party manufacturers of our manufacturing agreements based on factors beyond
our control; and
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our inability to timely identify and qualify a replacement for one of our third-party manufacturers following the termination,
expiration or nonrenewal of our agreements with such third-party manufacturer.
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Any of these
factors could disrupt the supply of our product candidates or approved products, cause us to incur higher costs, delay the approval
of our product candidates or prevent or disrupt the commercialization of our approved products. Furthermore, if any of our product
candidates are approved and our contract manufacturers fail to deliver the required commercial quantities of finished product on
a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of
production at a substantially equivalent cost, in substantially equivalent volumes and quality and on a timely basis, we would
likely be unable to meet demand for our products and could lose potential revenue. It may take several years to establish an alternative
source of supply and to have any such new source approved by the regulatory authorities that regulate our products in the United
States, Europe and our other target markets.
We
depend on third-party vendors and CROs for certain of our clinical trial and product development activities. If we are unable to
maintain our relationship with any one or more of these providers, we could experience a significant delay in both identifying
another comparable provider and then contracting for its services, which could adversely affect our clinical trial and product
development efforts. We may be unable to retain an alternative provider on reasonable terms, or at all. Even if we locate an alternative
provider, it is likely that such a provider will need additional time to respond to our needs and may not provide the same type
or level of services as the original provider. In addition, any CRO that we retain will be subject to the FDA’s regulatory
requirements and similar foreign standards and we do not have control over compliance with these regulations by these providers.
If these requirements and standards are not adhered to by these providers, the commercialization and development of our product
candidates or approved products could be delayed, which could harm our business and financial condition
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Even though we have
received conditional approval of Ocaliva for PBC, we and our contract manufacturers are still subject to strict, ongoing regulatory
requirements.
Even though
we have received conditional approval of Ocaliva for the treatment of PBC in combination with ursodiol in adults with an inadequate
response to ursodiol or as monotherapy in adults unable to tolerate ursodiol, we and our contract manufacturers are subject to
ongoing regulatory requirements relating to, among other things, Ocaliva’s manufacturing, labeling, packaging and storage.
In addition, we and our contract manufacturers and our contract manufacturers’ facilities are required to comply with extensive
FDA and EMA requirements and the requirements of other similar regulatory authorities, including requirements that quality control
and manufacturing procedures conform to current cGMPs. As such, we and our contract manufacturers are subject to periodic cGMP
inspections and must continue to expend time, money and effort to ensure compliance with applicable manufacturing, production and
quality control requirements. We are also required to report certain adverse reactions and production problems, if any, to the
FDA, EMA and other similar regulatory authorities and to comply with certain requirements concerning advertising and promotion
for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory
restrictions and generally must be consistent with the information in the product’s approved label.
If a regulatory
authority such as the FDA discovers previously unknown problems with one of our products, such as adverse events of unanticipated
severity or frequency or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing
or labeling of one of our products, it may impose restrictions on that product or us, including requiring withdrawal of the product
from the market. In addition, if we or our contract manufacturers, other third-party vendors or collaborators fail to comply with
applicable regulatory requirements, a regulatory agency may, among other things:
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issue Form 483 notices or Warning Letters, in the case of the FDA, or similar notices, in the case of other regulatory agencies;
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mandate modifications to our promotional materials or require us to provide corrective information to healthcare practitioners;
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require us or our collaborators to enter into a consent decree or permanent injunction, which may include the imposition of
various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
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suspend any of our ongoing clinical studies;
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impose administrative, civil or criminal penalties;
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withdraw regulatory approval or require changes to our product label, including the inclusion of additional warnings or changes
to the approved indication;
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refuse to approve pending applications or supplements to approved applications filed by us or our collaborators;
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impose restrictions on operations, including costly new manufacturing requirements; or
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seize or detain products.
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We must comply with
environmental, health and safety laws and regulations
Our activities
involve the controlled storage, use and disposal of hazardous materials. We are subject to federal, state, city and local laws
and regulations, in and outside the United States, governing the use, manufacture, storage, handling and disposal of these hazardous
materials. Although we believe that the safety procedures we use for handling and disposing of these materials comply with the
standards prescribed by applicable laws and regulations, we cannot eliminate the risk of accidental contamination or injury from
these materials. In the event of an accident, regulatory authorities may curtail the use of these materials and interrupt our business
operations. We do not currently maintain hazardous materials insurance coverage.
Risks Related to the Commercialization
of Our Products
Sales of Ocaliva may
be adversely affected by safety and labeling changes required by the FDA.
In the course
of our post-marketing pharmacovigilance activities, deaths have been reported in PBC patients with moderate or severe hepatic impairment.
In an analysis performed by us and in consultation with the FDA, we concluded that certain of these patients were prescribed once
daily doses of Ocaliva, which is seven times higher than the recommended weekly dose in such patients. As a result, in September
2017, we issued a DHCP letter and the FDA also subsequently issued its own safety communication to reinforce recommended label
dosing. Both communications remind healthcare providers of the importance of the recommended reduced dosing of Ocaliva in PBC patients
with moderate or severe hepatic impairment, while reiterating the importance of monitoring PBC patients for progression of their
disease and the occurrence of liver-related adverse reactions. In February 2018, we announced that the Ocaliva label in the United
States had been updated by the FDA to include a boxed warning and a dosing table that reinforce the existing dosing schedule for
patients with Child-Pugh Class B or C or decompensated cirrhosis. In addition, the FDA issued an updated drug safety communication
to accompany the revised label. We remain focused on the safety of all of the patients using Ocaliva within and outside of our
ongoing clinical studies and have engaged with relevant regulatory authorities, including the EMA, to ensure that the Ocaliva label
in all applicable jurisdictions sufficiently reinforces the importance of appropriate dosing in patients with advanced cirrhosis.
These events, the revised label, any future label changes that may be required by the FDA or other relevant regulatory authorities
and any safety concerns associated with Ocaliva, perceived or real, may adversely affect our Ocaliva commercialization efforts
and, consequently, our financial condition and results of operations.
We are subject to uncertainty
relating to pricing and reimbursement. Failure to obtain or maintain adequate coverage and reimbursement for Ocaliva or our other
future approved products, if any, could limit our ability to market those products and decrease our ability to generate revenue.
The availability
and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive treatments.
Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which
drugs they will cover and establish payment levels. Sales of Ocaliva and our other future approved products, if any, depend and
will depend substantially, both domestically and internationally, on the extent to which their cost will be paid by health maintenance,
managed care, pharmacy benefit and similar healthcare management organizations or reimbursed by government health administration
authorities, private health coverage insurers and other third-party payors. Reimbursement policies could reduce the demand for,
or the price paid for, our products.
We cannot be
certain that reimbursement will be available for Ocaliva or our other future approved products, if any. If reimbursement is not
available or is available on a limited basis, we may not be able to successfully commercialize Ocaliva or our other future approved
products, if any.
In addition,
third-party payors attempt to contain healthcare costs by demanding price discounts or rebates and limiting both the types and
variety of drugs that they will cover and the amounts that they will pay for drugs. As a result, they may not cover or provide
adequate payment for our products. In addition, we may be required to conduct post-marketing studies in order to demonstrate the
cost-effectiveness of our products to such payors’ satisfaction. Such studies might require us to commit a significant amount
of management’s time and our financial and other resources and our products might not ultimately be considered cost-effective.
Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate
return on our investment in product development. The market for a drug depends significantly on access to third-party payors’
drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. Third-party payors may
refuse to include a particular drug in their formularies or restrict patient access to a branded drug when a less costly generic
equivalent or other alternative is available, even if not approved for the indication for which the branded drug is approved. Due
to there being no uniform policy of coverage and reimbursement in the United States among commercial payors, coverage and reimbursement
for pharmaceutical products may differ significantly from payor to payor.
We do not
know if Ocaliva will obtain and maintain broad acceptance from third-party payors in the jurisdictions in which it is or may in
the future be approved. The coverage determination process is a time-consuming and costly process that requires us to provide scientific
and clinical support for the use of Ocaliva for PBC to each payor separately, with no assurance that coverage will be obtained
or maintained. If we are unable to obtain and maintain adequate coverage of Ocaliva from third-party payors, the adoption of Ocaliva
by physicians and patients as a treatment for PBC may be limited. This in turn could affect our ability to successfully commercialize
Ocaliva and adversely impact our profitability, results of operations, financial condition and future success.
Legislative healthcare
reform may adversely affect our business.
In the United
States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”) changed the way Medicare
covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for
outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered
in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs. Any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we
might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often
follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results
from the MMA may result in a similar reduction in payments from non-governmental payors.
In March 2010,
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively,
the “ACA”), became law in the United States. Among other things, the purpose of the ACA is to reduce the cost of healthcare
and substantially change the way healthcare is financed by both governmental and private insurers. The ACA requires discounts under
the Medicare drug benefit program and increased the rebates paid by pharmaceutical companies on drugs covered by Medicaid. The
ACA also imposes an annual fee, which increases annually, on sales by branded pharmaceutical manufacturers. Since its enactment,
there have been a number of judicial, executive and legislative challenges to the ACA, including recent tax legislation that removes
the financial penalties for people who do not carry health insurance commencing in 2019 and an Executive Order signed in October
2017 by President Trump directing federal agencies to modify how the ACA is implemented. There is still uncertainty whether the
ACA will undergo additional revisions, and we cannot predict the impact of any future modifications. There have also been recent
state legislative efforts to address drug costs, which have generally focused on increasing transparency around drug costs or limiting
drug prices. We cannot predict the success of any such current or future federal or state legislative efforts.
Reimbursement
in the European Union and many other territories must be negotiated on a country-by-country basis and in many countries a product
cannot be commercially launched until reimbursement is approved. The timing to complete the negotiation process in each country
is highly uncertain. While we have been able to achieve rapid reimbursement decisions in certain countries, we expect that it may
still require a significant period of time before we receive reimbursement decisions in a number of other countries. Even after
a price is negotiated, countries frequently request or require adjustments to the price and other concessions over time or require
approvals regionally. Reimbursement agencies in Europe are often more conservative than those in the United States and the reimbursement
process is often slower since reimbursement decisions are made on a country-by-country basis. Prices for drugs in Europe are generally
lower than in the United States and tend to decrease over time.
The United States
and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change
their healthcare systems in ways that could affect our ability to sell our products profitably. Among policy makers and payors
in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals
of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical
industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We
expect to experience pricing pressures in connection with the sale of Ocaliva and our other future approved products, if any, due
to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative
proposals. Pricing pressures recently experienced by the pharmaceutical industry may be further exacerbated by legislative and
policy changes under consideration by the Trump administration.
Ocaliva and our other
future approved products, if any, may not achieve broad market acceptance among physicians, patients and healthcare payors, and
revenues generated from their sales may be limited as a result.
The commercial
success of Ocaliva and our other future approved products, if any, will depend upon their acceptance among the medical community,
including physicians, healthcare payors and patients. In order for Ocaliva to be commercially successful for PBC, we need to demonstrate
its utility as a cost-effective treatment for PBC patients who have an inadequate response to ursodiol or who are unable to tolerate
ursodiol. Ocaliva also must be shown to be a safe and tolerable treatment in a commercial use setting as it is intended to be a
lifetime therapy for patients eligible for treatment. We cannot be certain that Ocaliva or our other future approved products,
if any, will achieve an adequate level of acceptance among the medical community, including physicians, healthcare payors and patients.
The degree of
market acceptance of our approved products depends on a number of factors, including:
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limitations, warnings, precautions, boxed warnings, contraindications, restrictions or other statements
contained in the product label approved by the FDA, EMA or other relevant regulatory authorities;
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changes in the standard of care or availability of alternative therapies at similar or lower costs
for the targeted indications for any of our products, such as ursodiol for the treatment of PBC;
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limitations in the approved indications for our products;
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demonstrated clinical safety and efficacy compared to other products;
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a lack of adverse side effects, including significant adverse side effects;
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sales, marketing and distribution support;
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availability of reimbursement from managed care plans and other third-party payors;
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the timing of the market introduction and perceived effectiveness of competitive products;
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the degree of cost-effectiveness;
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availability of alternative therapies at similar or lower cost, including generics and over-the-counter
products;
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the extent to which our products are approved for inclusion on formularies of hospitals and managed
care organizations;
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whether our products are designated under physician treatment guidelines for the treatment of the
indications for which we have received regulatory approval;
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adverse publicity about our products or favorable publicity about competitive products;
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convenience and ease of administration of our products; and
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potential product liability claims.
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In addition,
the potential market opportunity for Ocaliva and our other future approved products, if any, is difficult to precisely estimate.
For example, our estimates of the potential market opportunity for Ocaliva for PBC include a number of key assumptions related
to prevalence rates, patients’ access to healthcare, diagnosis rates and patients’ response to or tolerance of Ocaliva,
which are based on available literature and epidemiology research in PBC, our industry knowledge gained through market research
and other methods, industry publications, third-party research reports and other surveys. While we believe that our internal assumptions
are reasonable, no independent source has verified such assumptions. If any of these assumptions prove to be inaccurate, then the
actual market for Ocaliva for PBC could be smaller than our estimates of our potential market opportunity. If the actual market
opportunity for Ocaliva or our other future approved products, if any, is smaller than we expect, our product revenue may be limited
and our financial condition and results of operations adversely affected.
If Ocaliva or
our other future approved products, if any, do not achieve an adequate level of acceptance among the medical community, including
physicians, healthcare payors and patients, sufficient revenue may not be generated from these products and we may not become or
remain profitable. In addition, efforts to educate the medical community and third-party payors on the benefits of Ocaliva and
our other future approved products, if any, may require significant resources and may never be successful.
We have limited sales,
marketing and distribution experience and we will need to continue to invest in significant additional resources to develop those
capabilities or enter into acceptable third-party sales and marketing arrangements.
We have limited
sales, marketing and distribution experience as a commercial organization. The commercial launch of Ocaliva for PBC is our first
product launch. We are commercializing Ocaliva in the United States, Europe and Canada using our internal commercial organization,
as well as a contract sales organization, and may develop commercial infrastructure or utilize the services of third-party collaborators
in certain other jurisdictions. We have not yet decided on our commercialization strategy for OCA for other indications or for
our other product candidates, in each case, if approved. To develop internal sales, distribution and marketing capabilities, we
have invested and expect to continue to invest significant additional amounts of financial and management resources.
Recruiting and
training a commercial organization is expensive, time-consuming and could delay any product launch. If the commercial launch of
an approved product for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does
not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly,
and our investment could be lost if we cannot retain or reposition our sales and marketing personnel.
For approved
products where we decide to perform sales, marketing and distribution functions ourselves or through third parties, we could face
a number of additional risks, including:
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we or our third-party sales collaborators may not be able to attract and build, or retain an effective
marketing or sales force;
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the cost of securing or establishing a marketing or sales force may exceed the revenues generated
by any products; and
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our sales and marketing efforts may not be successful.
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Under the License
Agreement, Sumitomo Dainippon has an exclusive license to develop and commercialize OCA for the treatment of PBC and NASH in China
(excluding Taiwan), and we may utilize the services of third-party collaborators in certain other jurisdictions. We may have limited
or no control over the sales, marketing and distribution activities of these third parties, and our future revenues may depend
heavily on their success.
We will incur significant
liability if it is determined that we have promoted or are promoting any “off-label” use of Ocaliva.
Physicians are
permitted to prescribe drug products for uses that are not described in the product’s labeling and that differ from those
approved by the FDA or other applicable regulatory agencies. Off-label uses are common across medical specialties. Although the
FDA and other regulatory agencies do not regulate a physician’s choice of treatments, the FDA and other regulatory agencies
do restrict communications on the subject of off-label use. Companies are not permitted to promote drugs for off-label uses. The
FDA and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting promotion of off-label uses
and the promotion of products for which marketing approval has not been obtained. A company that is found to have improperly promoted
off-label uses will be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.
A significant number of pharmaceutical companies have been the target of inquiries and investigations by various governmental authorities
in the United States and abroad.
While we have
implemented a corporate compliance program based on what we believe are current best practices, we cannot provide any assurance
that governmental authorities will find that our business practices comply with all current or future administrative or judicial
interpretations of potentially applicable laws and regulations. In addition, government and regulatory agencies may hold us responsible
for any actions by our sales representatives or sales organizations to the extent that they do not comply with applicable laws
and regulations. If we or our contract sales organization fail to comply with any of these laws and regulations, we could be subject
to a range of penalties, including criminal and significant civil penalties, fines, damages, curtailment or restructuring of our
operations, exclusion, disqualification or debarment from participation in federally- or state-funded healthcare programs or other
sanctions or litigation, any of which could have a significant adverse impact on our business, financial condition and results
of operations.
If we market products
in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting or physician payment disclosure
laws, we may be subject to civil or criminal penalties.
In addition
to FDA restrictions on the marketing of pharmaceutical products, several other types of state and federal healthcare laws, commonly
referred to as “fraud and abuse” laws, have been applied in recent years to restrict certain marketing practices in
the pharmaceutical industry. Other jurisdictions including Europe have similar laws and are enacting more stringent regulations.
These laws include false claims and anti-kickback statutes. If we market our products and our products are paid for by governmental
programs, it is possible that some of our business activities could be subject to challenge under one or more of these laws.
Federal false
claims laws generally prohibit anyone from knowingly and willingly presenting, or causing to be presented, any claims for the payment
for goods (including drugs) or services to third-party payers (including Medicare and Medicaid) that are false or fraudulent. The
federal civil monetary penalties statute, likewise, imposes penalties against any person or entity that, among other things, is
determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know
is for an item or service that was not provided as claimed or is false or fraudulent.
The federal
healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or
receiving remuneration to generate business, including the purchase or prescription of a particular product covered by Medicare,
Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, purchasers or formulary managers on the other. Although there are several statutory
exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are
drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject
to scrutiny if they do not qualify for an exemption or safe harbor.
The federal
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created additional federal criminal statutes
that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare
benefit program, or obtain, by means of false or fraudulent pretenses, or promises, any of the money or property owned by, or under
the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and
willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statement,
in connection with the delivery of, or payment for, healthcare benefits, items or services. HIPAA, as amended by the Health Information
Technology for Economic and Clinical Health Act, also imposes significant requirements on the receipt and transfer of protected
health information.
In addition,
the federal transparency requirements under the Physician Payments Sunshine Act require certain manufacturers of drugs for which
payment is available under certain federal healthcare programs annually to report information related to payments and other transfers
of value to physicians and teaching hospitals, and physician ownership and investment interests.
Finally, we
must offer discounted pricing or rebates on Ocaliva under various federal and state healthcare programs, and report specific prices
to government agencies under healthcare programs. The calculations necessary to determine the prices reported are complex and the
failure to report prices accurately may expose us to significant penalties.
There are foreign
and state law equivalents of these laws and regulations, such as anti-kickback, false claims, transparency and data privacy and
security laws, to which we are currently and/or may in the future be subject. We may also be subject to foreign and state laws
that require manufacturers to report information related to payments and other transfers of value to physicians and other healthcare
providers or marketing expenditures. Many of these laws differ from each other in significant ways, thus increasing the cost and
complexity of our compliance efforts.
A number of
pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing
activities, including providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers;
reporting inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label
promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates.
If we or our
operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to
us, we may be subject to penalties, including criminal and significant civil penalties, damages, fines, imprisonment, exclusion
of products from reimbursement under United States federal or state healthcare programs, and the curtailment or restructuring of
our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect
our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation
and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these
laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's
attention from the operation of our business. Moreover, achieving and sustaining compliance with these laws may prove costly.
We may not be successful
in establishing, implementing and maintaining development and commercialization collaborations, which could adversely affect our
ability to develop certain of our product candidates and our financial condition and operating results. If Sumitomo Dainippon or
any future strategic collaborator fails to perform its obligations under, or terminates, its agreement with us, our business could
be substantially harmed.
Developing pharmaceutical
products, conducting clinical trials, obtaining regulatory approval, expanding manufacturing capabilities and marketing approved
products are expensive, complex and time-consuming undertakings. As a result, we have in the past entered into, and may in the
future seek to enter into, collaborations with third parties upon whom we may rely for financial resources and for development,
regulatory and commercialization expertise for selected products or product candidates and in selected jurisdictions. For example,
under the License Agreement, Sumitomo Dainippon has an exclusive license to develop and commercialize OCA for the treatment of
PBC and NASH in China (excluding Taiwan). We may also establish collaborations with respect to the development and commercialization
of OCA in other jurisdictions and for other product candidates and research programs. Additionally, we may enter into sales and
marketing arrangements with third parties with respect to approved products in certain jurisdictions.
Our collaborators
may fail to develop or effectively commercialize products, product candidates or technologies for a variety of reasons, including
a lack of sufficient resources, a decision not to devote the necessary resources due to internal constraints, such as limited cash
or human resources, a change in strategic focus or a failure to obtain the necessary regulatory approvals. For example, our strategic
collaboration with Sumitomo Dainippon may not be successful due to a number of important factors, including the following:
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Sumitomo Dainippon has significant discretion in determining the efforts and resources that it
will apply to its strategic collaboration with us. The timing and amount of any cash payments, milestones and royalties that we
may receive under the License Agreement will depend on, among other things, the efforts, allocation of resources and successful
development and, if approved, commercialization of OCA in China (excluding Taiwan) by Sumitomo Dainippon;
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subject to certain restrictions contained in the License Agreement, it is possible that Sumitomo
Dainippon may develop and commercialize, either alone or with others, or be acquired by a company that has, products that are similar
to or competitive with the product candidates that it licenses from us;
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Sumitomo Dainippon may change the focus of its development and commercialization efforts or pursue
higher-priority programs;
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Sumitomo Dainippon may, under specified circumstances, terminate the License Agreement on short
notice and for circumstances outside of our control, which could make it difficult for us to attract new strategic collaborators
or adversely affect how we are perceived in the scientific and financial communities;
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Sumitomo Dainippon has, under certain circumstances, the right to maintain or defend our intellectual
property licensed to it in its territory and, although we may have the right to assume the maintenance and defense of our intellectual
property if Sumitomo Dainippon does not, our ability to do so may be compromised by its acts or omissions;
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Sumitomo Dainippon may utilize our intellectual property in such a way as to invite litigation
that could jeopardize or invalidate our intellectual property or expose us to potential liability; and
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Sumitomo Dainippon may not comply with all applicable regulatory requirements.
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Pursuant to
the Sumitomo Amendment, we and Sumitomo Dainippon agreed that if certain clinical development milestones in China (excluding Taiwan)
are not met by December 31, 2020, Sumitomo Dainippon may choose either to pay us a milestone payment or terminate the License Agreement.
If Sumitomo Dainippon fails to develop or effectively commercialize OCA for PBC or NASH in China (excluding Taiwan), or terminates
the License Agreement, we may not be able to replace it with another collaborator. In addition, pursuant to the Sumitomo Amendment,
Sumitomo Dainippon agreed to return the rights to develop and commercialize OCA in Japan and Korea and we agreed to forego any
further milestone or royalty payments with respect thereto. We may not be successful in reaching an agreement with an alternative
collaborator for Japan and Korea.
If we are unable
to maintain our existing arrangements or enter into any new such arrangements on acceptable terms, if at all, we may be unable
to effectively market and sell our products in our target markets. We expect to face competition in seeking appropriate collaborators.
Moreover, collaboration and similar arrangements such as the License Agreement are complex and time consuming to negotiate, document
and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and
implement collaborations or other alternative arrangements for the development of our product candidates. When we collaborate with
a third party for development and commercialization of a product candidate or approved product, we can expect to relinquish some
or all of the control over the future success of that product candidate or product to the third party. Our collaboration partner
may not devote sufficient resources to the commercialization of our products or product candidates or may otherwise fail in their
commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition,
any collaboration that we enter into, including the License Agreement, may be unsuccessful. In some cases, we may be responsible
for continuing preclinical and initial clinical development of a partnered product candidate or research program, and the payment
we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach
agreements with suitable collaborators, we may incur increased costs, we may be forced to limit the number of products or product
candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize products
or programs or territories for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations,
our operating results and financial condition could be materially and adversely affected.
If we fail to develop
OCA for additional indications, our commercial opportunity will be limited.
To date, we
have focused the majority of our development efforts on the development of OCA. One of our strategies is to pursue clinical development
of OCA for NASH and other progressive non-viral liver diseases, to the extent that we have sufficient funding to do so.
PBC is an orphan
disease and the potential market size for Ocaliva for PBC is relatively limited. Furthermore, because a significant proportion
of PBC patients do not exhibit any symptoms at the time of diagnosis, PBC may be left undiagnosed for a significant period of time.
Due to these factors, our ability to grow revenues will be dependent on our ability to increase market share and successfully develop
and commercialize OCA for the treatment of additional indications. In particular, we believe that our future success will depend
in large part on the results of our development of OCA for the treatment of NASH. Although NASH is believed to be one of the most
prevalent chronic liver diseases worldwide, NASH may be left undiagnosed for a long time and a definitive diagnosis of NASH is
currently based on a histological assessment of a liver biopsy, which impacts the ability to easily identify patients. Furthermore,
even if we are successful in developing and obtaining marketing approval of OCA for the treatment of NASH, we may not be able to
commercialize OCA successfully.
The completion
of development, securing of approval and commercialization of OCA for additional indications will require substantial additional
funding and is prone to the risks of failure inherent in drug development. We cannot provide you any assurance that we will be
able to successfully advance any of these indications through the development process. Even if we receive FDA or EMA approval to
market OCA for the treatment of any of these additional indications, we cannot assure you that any such additional indications
will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives.
If we are unable to successfully develop and commercialize OCA for these additional indications, our commercial opportunity will
be limited and our business prospects will suffer.
Risks Related to Our Business and Strategy
We depend on third-party
contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed
these functions ourselves.
We outsource
and plan to continue to outsource substantial portions of our operations to third-party service providers, including
CROs
for certain of our clinical trial and product development activities, contract manufacturers for
the production of active
pharmaceutical ingredient and finished drug product for our commercial sales and for our clinical trials and preclinical studies
and a contract sales organization for the commercialization of Ocaliva in certain jurisdictions. We will likely also use the services
of third-party vendors in connection with our future commercialization activities, including product sales, marketing and distribution.
Our agreements with third-party service providers are on a study-by-study and/or project-by-project basis. Typically, we may terminate
these agreements with notice and are responsible for the supplier’s previously incurred costs. In addition, a number of third-party
service providers that we retain will be subject to the FDA’s and EMA’s regulatory requirements and similar standards
outside of the United States and Europe and we do not have control over compliance with these regulations by these providers. If
these providers do not adhere to applicable governing practices and standards, the development and commercialization of Ocaliva
and our product candidates could be delayed or stopped, which could severely harm our business and financial condition.
Because we have
relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves the
risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at
all. In the past, we experienced difficulties with a third-party contract manufacturer for OCA, including delays in receiving adequate
clinical trial supplies as and when requested. We subsequently replaced this manufacturer, but it is possible that we could experience
similar difficulties in the future. In addition, the use of third-party service providers requires us to disclose our proprietary
information to these parties, which could increase the risk that this information will be misappropriated. There are a limited
number of third-party service providers that have the specialized expertise required to achieve our business objectives. Identifying,
qualifying and managing the performance of third-party service providers can be difficult, time-consuming and cause delays in our
development programs. Despite our recent growth, we have limited internal resources available to identify and monitor third-party
service providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service
providers, our business may be adversely affected. We may further be subject to the imposition of civil or criminal penalties if
their conduct violates applicable law.
Our third-party
service providers generally are not prohibited from providing their services to other biopharmaceutical companies, including companies
that currently or may in the future compete with us. For example, certain of our third-party service providers and consultants
may be able to develop intellectual property to which we are not entitled under our agreements and that may eventually be used
to develop products that compete with our products. Although we generally have confidentiality and non-disclosure agreements in
place with our third-party service providers and consultants, such third parties may be able to provide services to other companies
without violating the terms of our agreements. In addition, although we may seek to enter into non-compete arrangements with our
key third-party service providers, such arrangements are difficult to negotiate and we may be unable to successfully enter into
such arrangements.
We face rapid technological
change and competition from other biotechnology and pharmaceutical companies. Our operating results will suffer if we fail to compete
effectively.
The biotechnology
and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors
in the United States, Europe and other jurisdictions, including major multinational pharmaceutical companies, established biotechnology
companies, specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of our competitors
have greater financial and other resources than we have, such as larger research and development staff and more experienced marketing
and manufacturing organizations. Large pharmaceutical companies, in particular, have extensive experience in clinical testing,
obtaining regulatory approvals, recruiting patients and manufacturing pharmaceutical products. These companies also have significantly
greater research, sales and marketing capabilities and collaborative arrangements in our target markets with leading companies
and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development
of novel compounds or to in-license novel compounds that could make our products or product candidates obsolete. As a result of
all of these factors, our competitors may succeed in obtaining patent protection and/or FDA, EMA or other regulatory approval or
discovering, developing and commercializing drugs for the diseases that we are targeting before we do. Smaller or early-stage companies
may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.
Some of the
pharmaceutical and biotechnology companies that we expect to compete with include Allergan plc, AstraZeneca plc, Acorda Therapeutics,
Inc., Boehringer Ingelheim GmbH, Bristol-Myers Squibb Company, Conatus Pharmaceuticals Inc., CymaBay Therapeutics, Inc., Dr. Falk
Pharma GmbH, Durect Corporation, Enanta Pharmaceuticals, Inc., ENYO Pharma SAS, Galectin Therapeutics Inc., Galmed Pharmaceuticals
Ltd., Genfit SA, Gilead Sciences, Inc., GlaxoSmithKline plc, Immuron Limited, Islet Sciences, Inc., Madrigal Pharmaceuticals, Inc.,
Metacrine, Inc., MiNA Therapeutics, NGM Biopharmaceuticals, Inc., Novartis AG, Novo Nordisk A/S, Shire plc, Viking Therapeutics,
Inc. and Zydus Pharmaceuticals (USA) Inc. Bezafibrate, a fibrate that has not been approved for commercialization by the FDA and
is only available outside of the United States, has been studied in multiple clinical trials for the treatment of liver diseases
including PBC and NASH. Genfit SA has an ongoing Phase 3 clinical trial of GFT505, a dual PPAR alpha/delta agonist, in NASH. Genfit
is also studying GFT505 for the treatment of PBC. Gilead Sciences, Inc. is conducting two Phase 3 clinical trials in NASH patients
of various disease severity with selonsertib, an inhibitor of the apoptosis signal-regulating kinase 1. Gilead Sciences, Inc. is
also exploring additional studies in NASH for GS-0976, a small molecule allosteric inhibitor that acts at the protein-protein homodimer
interface of acetyl-CoA carboxylases acquired from Nimbus Therapeutics, LLC, and an FXR agonist known as GS-9674. Gilead Sciences,
Inc. is also studying a number of compounds in other liver diseases including PBC and PSC. Allergan plc has an ongoing Phase 3
clinical trial of cenicriviroc, an immunomodulator that blocks C-C chemokine receptor type 2 and type 5, for the treatment of NASH.
A number of other companies have trials in PBC, NASH and other liver diseases we are targeting.
In addition,
many universities and private and public research institutes may become active in our target disease areas. The results from our
POISE and FLINT trials and the approval of Ocaliva for PBC have brought more attention to our targeted indications and bile acid
chemistry. As a result, we believe that additional companies and organizations may seek to compete with us in the future. Our competitors
may succeed in developing, acquiring or licensing on an exclusive basis, technologies and drug products that are more effective
or less costly than OCA or any other product candidates that we are currently developing or that we may develop, which could render
our products or product candidates obsolete and noncompetitive.
Off-label uses
of other potential treatments may limit the commercial potential of our products and product candidates, especially given the pricing
of Ocaliva and the anticipated pricing for our product candidates. For example, while fibrates are not approved for use in PBC,
off-label use of fibrate drugs has been reported, though many fibrates are specifically contraindicated for use in PBC due to potential
concerns over acute and long-term safety in this patient population. In NASH, a number of treatments, including vitamin E (an antioxidant),
insulin sensitizers (e.g., metformin, pioglitazone), antihyperlipidemic agents (e.g., gemfibrozil), pentoxifylline and ursodiol,
are used off-label. Although none of these treatments have been clearly shown in clinical trials to alter the course of the disease,
in a previous study conducted by the NASH Clinical Research Network, similar improvements to those observed with OCA in the FLINT
trial in certain histological measures of NASH were reported with vitamin E and pioglitazone. Various other treatments, both approved
and unapproved, have been used in the other indications we are targeting.
We believe that
our ability to successfully compete will depend on, among other things:
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the results of our and our strategic collaborators’ clinical trials and preclinical studies;
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our ability to recruit and enroll patients for our clinical trials;
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the efficacy, safety and reliability of Ocaliva and our other future approved products, if any;
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the speed at which we develop our product candidates;
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our ability to design and successfully execute appropriate clinical trials;
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our ability to maintain productive relationships with regulatory authorities;
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the timing and scope of regulatory approvals, if any;
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our ability to commercialize and market Ocaliva and our other future approved products, if any;
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the price of our products;
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adequate levels of reimbursement under private and governmental health insurance plans, including Medicare;
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our ability to protect intellectual property rights related to our products;
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our ability to manufacture and sell commercial quantities of any approved products to the market; and
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acceptance of our products by physicians and other healthcare providers.
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If our competitors
market products that are more effective, safer or less expensive than our products or that reach the market sooner than our products,
we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by rapid technological change.
Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in
each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological
advances or products developed by our competitors may render our technologies, products or product candidates obsolete, less competitive
or not economical.
A variety of risks
associated with our international business operations and our planned international business relationships could materially adversely
affect our business.
We have formed
a number of subsidiaries in jurisdictions outside of the United States in connection with or in anticipation of our commercial
or other business activities in those jurisdictions. We are commercializing Ocaliva in certain jurisdictions in which it is approved,
including the United States, Europe and Canada, using our internal commercial organization, as well as a contract sales organization,
and may develop commercial infrastructure or utilize the services of third-party collaborators in other jurisdictions. In addition,
under the License Agreement, Sumitomo Dainippon has an exclusive license to develop and commercialize OCA for the treatment of
PBC and NASH in China (excluding Taiwan). Our international operations and business relationships subject us to additional risks
that may materially adversely affect our business and ability to attain or sustain profitability, including:
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the far-reaching anti-bribery and anti-corruption legislation in the United Kingdom, including the UK Bribery Act, and elsewhere
and escalation of investigations and prosecutions pursuant to such laws;
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compliance with complex import and export control laws;
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restrictions on direct investments by foreign entities and trade restrictions;
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differing regulatory requirements for drug approvals internationally and the inability to obtain necessary foreign regulatory,
pricing or reimbursement approvals of products in a timely manner;
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uncertainty regarding the collectability of accounts receivable;
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difficulties in staffing and managing international operations;
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potentially reduced protection for intellectual property rights;
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potential third-party patent rights in countries outside of the United States;
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the potential for so-called “parallel importing,” which is what occurs when a local seller opts to import goods
from another jurisdiction with relatively low prices, rather than buying them locally;
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unexpected changes in tariffs, trade barriers and regulatory requirements and the imposition of governmental controls;
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economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including
several countries in Europe;
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compliance with tax, employment, immigration and labor laws for employees working or traveling abroad;
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taxes in other countries;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other transactional
risks incident to doing business in foreign countries;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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production shortages resulting from events affecting raw material supply or manufacturing capabilities abroad;
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business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes,
volcanoes, typhoons, floods, hurricanes and fires; and
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increasingly complex standards for complying with foreign laws and regulations that may differ substantially from country to
country and may conflict with corresponding U.S. laws and regulations.
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For example,
we do not know the extent of the impact that Brexit will have on our business. As a result of Brexit, it is possible that Scotland
and Northern Ireland may each conduct a referendum to decide whether to leave the United Kingdom. Furthermore, other European countries
may seek to conduct referenda with respect to continuing membership in the European Union. We do not know to what extent these
changes will impact our business. Our ability to continue to conduct our international operations out of the United Kingdom, where
the headquarters for our international operations is located, may be materially and adversely affected.
In addition,
we are subject to the anti-bribery and anticorruption laws of the United States, as well as of foreign jurisdictions where we operate,
including the U.S. Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act. Generally, these laws prohibit
paying or offering anything of value to a foreign government official for the purpose of obtaining or retaining business. U.S.
and foreign regulators have increased their enforcement of anti-bribery and anticorruption laws in recent years, and failure to
comply with these laws could result in various adverse consequences, including:
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possible delay in approval or refusal to approve a product;
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recalls, seizures or withdrawal from the market of an approved product;
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disruption in the supply or availability of our products or suspension of export or import privileges;
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the imposition of civil or criminal sanctions;
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the prosecution of executives overseeing our international operations; and
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damage to our reputation.
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Any significant
impairment of our ability to sell products outside of the United States could adversely impact our business and financial results.
Our business and operations
would suffer in the event of system failures, data breaches or violations of data protection laws.
We are increasingly dependent
on information technology systems and infrastructure, including mobile technologies, to operate our business. In the ordinary course
of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary
business information and personally identifiable information. It is critical that we do so in a secure manner to maintain the confidentiality
and integrity of such confidential information. The size and complexity of our information technology systems, and those of third-party
vendors with whom we contract, and the volume of data we retain, make such systems potentially vulnerable to breakdown, malicious
intrusion, security breaches and other cyber-attacks. Information security risks have significantly increased in recent years in
part due to the proliferation of new technologies and the increased sophistication and activities of organized crime, hackers,
terrorists and other external parties, including foreign state actors. A security breach or privacy violation that leads to disclosure
or modification of or prevents access to personally identifiable information or other protected information could harm our reputation,
compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective
action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations
that protect personal data, resulting in increased costs or loss of revenue. Similarly, the loss of clinical trial data from completed
or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our
costs to recover or reproduce the data. If we are unable to prevent such security breaches or privacy violations or implement satisfactory
remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial loss and other regulatory
penalties because of lost or misappropriated information. In addition, these breaches and other inappropriate access can be difficult
to detect, and any delay in identifying them may lead to increased harm of the type described above. Moreover, the prevalent use
of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss
of confidential information, trade secrets or other intellectual property. As cyber threats continue to evolve, we may be required
to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate
any information security vulnerabilities. While we have implemented security measures to protect our data security and information
technology systems, such measures may not prevent such events. Significant disruptions of our information technology systems or
breaches of data security could have a material adverse effect on our business, financial condition and results of operations.
Our information security
systems are subject to laws and regulations requiring that we take measures to protect the privacy and security of certain information
we gather and use in our business. For example, HIPAA, and its implementing regulations impose, among other requirements, certain
regulatory and contractual requirements regarding the privacy and security of personal health information. In addition to HIPAA,
numerous other federal and state laws, including, without limitation, state security breach notification laws, state health information
privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure and storage of personal information.
Various foreign
countries where we may process personal information also have, or are developing, laws governing the collection, use, disclosure
and storage of personal information. The legislative and regulatory landscape for privacy and data protection continues to evolve,
and there has been an increasing amount of focus on privacy and data protection issues that may affect our business. In July 2016,
U.S. and European Commission officials adopted a new framework called the EU-U.S. Privacy Shield to govern cross-border flows of
personal data. We adopted the EU-U.S. Privacy Shield and certified to its requirements in October 2016 and recertified in October
2017.
In May 2018,
the General Data Protection Regulation (the “GDPR”) took effect in the European Union. The GDPR imposes more stringent
data protection requirements, and provides for greater penalties for noncompliance, than previous EU data protection legislation.
Although the GDPR applies across the European Union without the need for local implementing legislation, local data protection
authorities retain the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country
basis. Implementation of the GDPR and other changes in privacy and data protection laws or regulations could require changes to
certain of our business practices, thereby increasing our costs. While we are actively employing the EU-U.S. Privacy Shield as
a means to legitimize the transfer of personal information from the European Union and Switzerland to the United States, and are
engaging in activities to comply with the GDPR requirements, we may be unsuccessful in these efforts.
The legislative and regulatory
landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and
data protection issues that may affect our business. There is a degree of uncertainty associated with the legal and regulatory
environment around privacy and data protection laws, which continue to develop in ways we cannot predict, including with respect
to evolving technologies, such as cloud computing. Privacy and data protection laws may be interpreted and applied inconsistently
from country to country and impose inconsistent or conflicting requirements. Varying jurisdictional requirements could increase
the costs and complexity of compliance or require us to change our business practices in a manner adverse to our business. A determination
that we have violated privacy or data protection laws could result in significant damage awards, fines and other penalties that
could, individually or in the aggregate, materially harm our business and reputation.
We have significantly
expanded our operations in recent years, and will need to continue our expansion to support our future development strategy for
OCA for indications other than PBC, including NASH. We may experience difficulties in managing our significant growth.
We have significantly
expanded our operations, including the size of our employee base, in recent years and expect to continue to grow as we pursue our
future development strategy. As we advance our preclinical and clinical development programs for OCA and our other product candidates,
seek regulatory approval in the United States and elsewhere and increase the number of ongoing product development programs, we
will need to increase our product development, scientific and administrative headcount. We will also need to grow our commercial
capabilities. Such an evolution may impact our strategic focus and our deployment and allocation of resources. Our management,
personnel and systems currently in place may experience difficulty in adjusting to our growth and strategic focus.
In addition,
in order to continue to meet our obligations as a public company and to support our anticipated longer-term growth, we will need
to increase our general and administrative capabilities. We have also expanded our operations geographically and formed a number
of subsidiaries outside of the United States. In addition to our U.S. offices, we have an office in London, which serves as the
headquarters for our international operations, and regional offices in a number of other countries, and we may further expand our
geographical footprint. Our management, personnel and systems currently in place may not be adequate to support this future growth.
Furthermore, we may face a number of complexities, such as being subject to national collective bargaining agreements for employees,
in some of the countries in which we operate.
Our need to
effectively manage our operations, growth and various projects requires that we:
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successfully attract and recruit new employees or consultants with the expertise and experience
we will require in the United States, Europe and other jurisdictions;
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manage our clinical programs effectively, which are often conducted at numerous domestic and international
clinical sites, and advance our other development efforts;
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develop and expand our marketing and sales infrastructure; and
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continue to improve our operational, financial and management controls, reporting systems and procedures.
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If we are unable
to successfully manage our growth and the increased complexity of our operations, our business may be adversely affected.
We may not be able
to manage our business effectively if we are unable to attract and retain key personnel and consultants.
We may not be
able to attract or retain qualified personnel and consultants due to the intense competition for such individuals among biotechnology,
pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel and consultants to accomplish
our business objectives, we may experience constraints that will significantly impede the achievement of our development and commercial
objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our industry
has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory,
commercialization and business development expertise of Dr. Mark Pruzanski, our co-founder, president and chief executive officer,
and the other members of our executive team, as well as other key employees and consultants. If we lose one or more of our executive
officers or other key employees or consultants, our ability to implement our business strategy successfully could be seriously
harmed. Any of our executive officers or other key employees or consultants may terminate their employment at any time and replacing
such individuals may be difficult and time-consuming because of the limited number of individuals in our industry with the necessary
breadth of skills and experience. Competition to hire and retain employees and consultants from this limited pool is intense, and
we may be unable to hire, train, retain or motivate such individuals.
We also have
key scientific and clinical advisors and consultants who assist us in formulating our research, development and clinical strategies.
These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that
may limit their availability to us and such individuals typically will not enter into non-compete agreements with us. If a conflict
of interest arises between their work for us and their work for another entity, we may lose their services. In addition, our advisors
may have arrangements with other companies to assist those companies in developing products or technologies that may compete with
ours.
Failure to establish
and maintain adequate finance infrastructure and accounting systems and controls could impair our ability to comply with the financial
reporting and internal controls requirements for publicly traded companies.
As a public
company, we operate in a demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002 and
related rules and regulations, expanded disclosure requirements, accelerated reporting requirements and complex accounting rules.
Responsibilities imposed by the Sarbanes-Oxley Act include establishing and maintaining corporate oversight and adequate internal
control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce
reliable financial reports and are important to help prevent financial fraud.
In particular,
our compliance with Section 404 of the Sarbanes-Oxley Act has required and will continue to require that we incur substantial accounting-related
expenses and expend significant management efforts. Our testing, or the testing by our independent registered public accounting
firm, may reveal deficiencies in our internal controls that we would be required to remediate in a timely manner. If we are not
able to comply with the requirements of the Sarbanes-Oxley Act, we could be subject to sanctions or investigations by the SEC,
the Nasdaq Stock Market or other regulatory authorities, which would require additional financial and management resources and
could adversely affect the market price of our securities. Furthermore, if we cannot provide reliable financial reports or prevent
fraud, our business and results of operations would likely be adversely affected.
Our employees may engage
in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading,
which could significantly harm our business.
We are exposed
to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the
regulations of the FDA, the SEC or other domestic or foreign regulators, provide accurate information to the FDA, the SEC or other
domestic or foreign regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report
financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business
arrangements in the healthcare industry are subject to extensive laws and regulations in the United States and abroad intended
to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit
a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive and other business arrangements.
Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result
in regulatory sanctions and serious harm to our reputation. Misconduct and misappropriation of confidential information by our
employees or third parties may also include improper trading in our securities, which may harm our reputation and result in enforcement
actions against us. We have adopted a global code of business conduct and implemented a corporate compliance program, but it is
not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity
may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or
other actions or lawsuits stemming from a failure to comply with applicable laws or regulations. The outcome of any such investigation,
action or lawsuit could have a significant negative impact on our business, including as a result of the imposition of significant
fines or other sanctions. In addition, the institution of any such investigation, action or lawsuit could negatively impact the
market price of our securities.
We face potential product
liability exposure, and if successful claims are brought against us, we may incur substantial liability for our products or product
candidates and may have to limit or suspend their use.
The use of our
product candidates in clinical trials and the sale of any products for which we may obtain marketing approval, such as Ocaliva
for PBC, expose us to the risk of product liability claims. Product liability claims may be brought against us or our collaborators
by participants enrolled in our clinical trials, patients, healthcare providers or others. If we cannot successfully defend ourselves
against any such claims, we would incur substantial liabilities. Regardless of their merit or eventual outcome, product liability
claims may result in:
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withdrawal of clinical trial participants;
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termination of clinical trial sites or entire trial programs;
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costs of related litigation;
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substantial monetary awards to patients or other claimants;
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decreased demand for our products and loss of revenues;
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impairment of our business reputation;
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diversion of management and scientific resources from our business operations; and
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the inability to develop and commercialize our products and product candidates or the withdrawal
of our products from the market.
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We have obtained
limited product liability insurance coverage for the commercial sale of our products and our clinical trials. Our insurance coverage
may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage
is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses due to product liability. Large judgments have been awarded in class action
lawsuits based on the unanticipated side effects of drug products. A successful product liability claim or series of claims brought
against us, particularly if judgments exceed our insurance coverage, could decrease our cash resources and adversely affect our
business.
Our insurance policies
are expensive and only protect us from some business risks, which leave us exposed to significant uninsured liabilities.
We do not carry
insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general
liability, employment practices liability, property, auto, workers’ compensation, products liability and directors’
and officers’ insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage.
Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our financial position
and results of operations. Furthermore, any increase in the volatility of our stock price may result in us being required to pay
substantially higher premiums for our directors’ and officers’ insurance, and may make it difficult for us to obtain
adequate coverage on reasonable terms, if at all.
If we engage in an
in-license transaction, acquisition, reorganization or business combination, we will face a variety of risks that could adversely
affect our business operations or our securityholders.
From time to
time, we have considered, and we will continue to consider in the future, strategic business initiatives intended to further the
expansion and development of our business. These initiatives may include in-licensing or acquiring products, technologies or businesses
or entering into a business combination with another company. If we pursue such a strategy, we could, among other things:
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issue equity securities that would dilute our current stockholders’ ownership;
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incur substantial debt that may place strains on our operations;
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be required to dedicate substantial operational, financial and management resources to integrate
new products, technologies or businesses;
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assume substantial actual or contingent liabilities;
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impair our ability to make payments of interest and principal on our outstanding debt, including
the Convertible Notes;
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reprioritize our development programs or cease development and commercialization activities with
respect to certain of our product candidates or products; or
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merge or otherwise enter into a business combination with another company, which may result in
our stockholders receiving cash and/or shares of the other company on terms that certain of our stockholders may not deem desirable.
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We may use our limited
financial and human resources to pursue a particular research program or product candidate that is ultimately unsuccessful or less
successful than other programs or product candidates that we may have forgone or delayed.
Because we have
limited resources, we may forego or delay the development of certain programs or product candidates that later prove to have greater
commercial potential than the programs or product candidates that we do pursue. Our resource allocation decisions may cause us
to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research
and development programs for product candidates may not yield any commercially viable products. If we fail to accurately evaluate
the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product
candidate through strategic collaboration, licensing or other royalty arrangements or we may allocate our limited internal resources
to that product candidate when it would have been more advantageous to enter into such an arrangement. Any such failure could have
a material adverse effect on our business, financial condition or results of operations.
Changes in our effective
income tax rate could adversely affect our results of operations.
We are subject
to income taxes in the United States and various foreign jurisdictions. Various factors may have favorable or unfavorable effects
on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes
in tax laws and rates, the accounting for stock options and other stock-based compensation, changes in accounting standards, future
levels of research and development spending, changes in the mix and level of pre-tax earnings in different jurisdictions, the outcome
of audits or other examinations by the U.S. Internal Revenue Service and tax regulators in other jurisdictions, the accuracy of
our estimates for unrecognized tax benefits, the realization of deferred tax assets and changes to our ownership or capital structure.
In late 2017,
the United States enacted the Tax Cuts and Jobs Act of 2017, which significantly changed U.S. tax law, including by implementing
a reduction in the corporate tax rate to 21%, moving from a worldwide tax system to a territorial system and imposing new or additional
limitations on the deductibility of interest expense and executive compensation.
The impact on
our effective income tax rate resulting from the above-mentioned factors and others may be significant and could adversely affect
our results of operations.
Risks Related to Our Intellectual Property
It is difficult and
costly to protect our proprietary rights, and we may not be able to ensure their protection. If our patent position does not adequately
protect our products and product candidates, others could compete against us more directly, which would harm our business, possibly
materially.
Our commercial
success will depend in part on our ability to obtain and maintain patent, trademark and trade secret protection covering our products
and product candidates, as well as our ability to successfully defend our intellectual property against third-party challenges.
Our ability to stop third parties from making, using, selling, offering to sell or importing our products is dependent upon the
extent to which we have regulatory exclusivity or intellectual property-based exclusivity rights under valid and enforceable patents
or other intellectual property that cover our products. If we fail to obtain and maintain adequate intellectual property protection,
we may not be able to prevent third parties from launching generic versions of our products, using our proprietary technologies
or from marketing products that are very similar or identical to ours.
The patent positions
of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles
remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in
the United States or in foreign jurisdictions, and the legal standards relating to the patentability, validity and enforceability
of pharmaceutical patents are evolving. Changes in either the patent laws or in interpretations of patent laws in U.S. and foreign
jurisdictions may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may
be enforced in the patents that we currently own or that may issue from the applications we have filed or may file in the future
or those that we may license from third parties. Additionally, our currently pending or future patent applications may not result
in issued patents, and any term extensions that we seek may not be granted. Further, if any patents we obtain or license are deemed
invalid or unenforceable, it could impact our ability to commercialize or license our technology or prevent third parties from
marketing products that are similar or identical to ours.
There have been
numerous changes to the patent laws that may have a significant impact on our ability to protect our technology and enforce our
intellectual property rights. In September 2011, the America Invents Act was signed into law. The final substantive provisions
of the America Invents Act became effective in March 2013. The America Invents Act includes a number of significant changes to
U.S. patent law that affect the way patent applications are filed, prosecuted and litigated, including, among other things, changing
from a “first to invent” to a “first inventor to file” system and creating processes, such as Inter Partes
Review (“IPR”) and other post-grant review processes, that permit third parties to challenge the patentability of granted
patents before the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (the “USPTO”). The IPR process,
for example, permits any person to challenge the validity of a patent on the grounds that it was anticipated or made obvious by
prior art. The America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution
of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect
on our business, financial condition, results of operations and growth prospects.
Others have
filed, and in the future, are likely to file, patent applications covering products and technologies that are similar or competitive
to ours, or may be important to our business. We cannot be certain that any patent application owned by a third party will not
have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in infringement,
interference, derivation, opposition or invalidity proceedings before U.S. or non-U.S. patent offices.
The degree of
future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep our competitive advantage. For example:
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others may be able to make compounds that are similar to our products or product candidates but that are not covered by the
claims of our patents;
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we might not have been the first to make the inventions covered by our patents or pending patent applications;
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we might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies, or may duplicate any of our technologies;
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any patents that we obtain may not provide us with any competitive advantages or exclusivity in a particular product area or
indication;
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we may not develop additional proprietary technologies that are patentable; or
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the patents of others may have an adverse effect on our business.
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We are the owner
of record of numerous issued U.S. and non-U.S. patents with claims directed to pharmaceutical compounds, pharmaceutical compositions,
methods of making these compounds and methods of using these compounds in various indications. In addition, we are the owner of
record of numerous pending U.S. and non-U.S. patent applications, and regularly pursue additional patent applications in various
jurisdictions.
Patents covering
the composition of matter of OCA expire in 2022 at the earliest and 2033 at the latest if the appropriate maintenance renewal,
annuity, or other government fees are paid. We expect that the other patents in the OCA portfolio, if the appropriate maintenance,
renewal, annuity or other governmental fees are paid, would expire from 2022 to 2036. Without patent protection, including patent
protection covering the composition of matter of our products and product candidates, our ability to stop others from using or
selling our products and product candidates may be limited.
Due to the patent
laws of a country, the decisions of a patent examiner in a country or our own filing strategies, we may not obtain patent coverage
for all of our products and product candidates or methods involving these candidates in the parent patent application. We plan
to pursue divisional patent applications or continuation patent applications in the United States and other countries to obtain
claim coverage for inventions which were disclosed but not claimed in the parent patent application.
If we do not obtain
protection under the Hatch-Waxman Act and similar legislation outside of the United States by extending the patent terms and obtaining
data exclusivity for our products and product candidates, our business may be materially harmed.
Depending upon
the timing, duration and specifics of FDA marketing approval of our products, U.S. patents may be eligible for a limited extension
of patent term under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”). The
Hatch-Waxman Act permits an extension of patent term of up to five years as compensation for patent term lost during product development
and the FDA regulatory review process. However, an extension may not be granted because of, for example, failure to apply within
applicable deadlines, failure to apply prior to expiration of relevant patents or failure to satisfy applicable requirements. Moreover,
the applicable time period or scope of patent protection afforded could be less than what is requested. If we are unable to obtain
patent term extension or restoration or the term of any such extension is less than we request, the period during which we will
have the right to exclusively market our product will be shortened, our competitors may obtain approval of competing products following
our patent expiration and our revenue could be reduced, possibly materially.
Our primary
composition of matter patent for OCA expires in 2022. In light of the U.S. marketing approval of Ocaliva for PBC in May 2016, we
have applied for an extension to the patent term for this patent in the United States through 2027. In addition, in connection
with the conditional approval of Ocaliva for PBC in the European Union, we have applied for supplementary patent certification
(“SPC”) to extend the patent term for this patent in the European Union through 2027. We have received grants of SPC
in Austria, Denmark, Germany, Italy, Spain and Sweden and we expect to take similar actions in other jurisdictions and countries
where similar regulations exist. In the event that we are unable to obtain any patent term extensions, the issued composition of
matter patents for OCA are expected to expire in 2022 at the earliest and 2033 at the latest if the appropriate maintenance renewal,
annuity, or other government fees are paid. We expect that the other patents in the OCA portfolio, if the appropriate maintenance,
renewal, annuity or other governmental fees are paid, would expire from 2022 to 2036.
We may incur substantial
costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and such litigation
may divert the attention of our management and scientific personnel and adversely affect our development and commercialization
efforts.
If we choose
to go to court or engage in other adversarial proceedings to stop another party from using the inventions claimed in any patents
we obtain, that individual or company has the right to ask the court or adjudicating body to rule that such patents are invalid,
not infringed or should not be enforced against that third party. These lawsuits and proceedings are expensive and would consume
time and resources and divert the attention of management and scientific personnel even if we are successful in defending our rights.
In addition, there is a risk that such court or adjudicating body will decide that such patents are not valid or not infringed,
and that we do not have the right to stop the other party from using the inventions. In addition, the U.S. Supreme Court has modified
some tests used by the USPTO in granting patents over the past 20 years, which may decrease the likelihood that we will be able
to obtain patents and increase the likelihood of challenge of any patents we obtain or license.
We may infringe the
intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing
or increase the costs of commercializing our products and product candidates.
Our success
will depend in part on our ability to operate without infringing the proprietary rights of third parties. We cannot guarantee that
our products, or the manufacture or use of our product candidates, will not infringe third-party patents. Furthermore, a third
party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s
patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling
our products and product candidates. These lawsuits are costly and could affect our results of operations and divert the attention
of management and scientific personnel. There is also a risk that a court would decide that we or our manufacturing or commercialization
partners are infringing the third party’s patents and would order us or our partners to stop the activities covered by the
patents. In that event, we or our partners may not have a viable way around the patent and may need to halt commercialization or
development of the relevant product or product candidate. In addition, there is a risk that a court will order us or our partners
to pay the other party damages for having violated the other party’s patents, and we may be subject to indemnification obligations
with respect to any such payments made by our partners. The pharmaceutical and biotechnology industries have produced a proliferation
of patents, and it is not always clear to industry participants, including us, which patents cover various types of products, product
candidates or methods of use. The coverage of patents is subject to interpretation by the courts, and such interpretation is not
always uniform.
If we are sued
for patent infringement, we would need to demonstrate that our products, product candidates or methods either do not infringe the
patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity
is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome
the presumption of validity enjoyed by issued patents. Even if we are successful in such proceedings, we may incur substantial
costs and divert management’s time and attention, which could have a material adverse effect on our business. If we are unable
to avoid infringing the patent rights of others, we may be required to seek a license, which may not be available, defend an infringement
action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient
resources to bring these actions to a successful conclusion. In addition, if we fail to obtain a license, develop or obtain non-infringing
technology, defend an infringement action successfully or have infringed patents declared invalid, we may incur substantial monetary
damages, encounter significant delays in bringing our products and product candidates to market and be precluded from manufacturing
or selling our products and product candidates.
We cannot be
certain that others have not filed patent applications for technology covered by our pending applications, or that we were the
first to invent or file with respect to a technology, because:
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some patent applications in the United States may be unpublished or otherwise maintained in secrecy until the patents are issued;
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patent applications in the United States are typically not published until 18 months after the priority date; and
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publications in the scientific literature often lag behind actual discoveries.
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Our competitors
may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application
may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such
technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in
an interference or derivation proceeding declared by the USPTO to determine priority of invention in the United States. The costs
of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our
U.S. patent position with respect to such inventions. Other countries have similar laws that permit secrecy of patent applications,
and such patent applications may be entitled to priority over our applications in such jurisdictions.
Some of our
competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially
greater financial and other resources. In addition, uncertainties resulting from the initiation and continuation of any such litigation
could have a material adverse effect on the market price of our securities and our ability to raise the funds necessary to continue
our operations.
Obtaining and maintaining
our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed
by governmental patent agencies, and our patent protection could be reduced or eliminated as a result of non-compliance with these
requirements.
Periodic maintenance
fees, renewal fees, annuity fees and various other governmental fees on our patents and patent applications are required to be
paid to the USPTO and foreign patent agencies in several stages over the lifetime of such patents and patent applications. In addition,
the USPTO and foreign patent agencies require compliance with a number of procedural, documentary, fee payment and other similar
provisions during the patent application process. We have implemented systems and engaged reputable third-party service providers
to help ensure that we comply with such requirements on a timely basis, but inadvertent lapses may occur and there are situations
in which noncompliance can result in abandonment or lapse of the relevant patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. Any such event may impair our competitive position in the relevant
jurisdiction and have a material adverse effect on our financial condition or results of operations.
We may be subject to
claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. If we are not able
to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology, products and
product candidates could be significantly diminished.
As is common
in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees,
or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers.
Litigation may be necessary to defend against these claims, which could result in substantial costs and be a distraction to management
even if we are successful.
We may rely
on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or
obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees,
consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other
proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide
an adequate remedy in the event of unauthorized disclosure of confidential information. Third parties, including competitors of
ours, may also independently discover our trade secrets or other proprietary information. In addition, we may be required under
U.S. or foreign transparency initiatives or other regulations to publicly disclose or otherwise make available certain information
that we consider to be proprietary, including pre-clinical and clinical research data. Enforcing a claim that a third party illegally
obtained and is using any of our trade secrets or other proprietary information is expensive and time consuming, and the outcome
is unpredictable. In addition, courts outside of the United States are sometimes reluctant to protect trade secrets. Costly and
time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain
or maintain protection of our trade secrets and other proprietary information could adversely affect our competitive business position.
We have not yet registered
all of our trademarks and failure to secure such registrations could adversely affect our business.
We have numerous
trademark and service mark registrations and pending trademark and service mark applications in the United States and abroad.
Our trademark
applications may not be allowed for registration and our registered trademarks may not be maintained or enforced. During prosecution
of applications for trademark registration, we may receive rejections or refusals. Although we are given an opportunity to respond,
we may be unable to overcome such rejections. In addition, the USPTO and comparable agencies in many other jurisdictions provide
third parties with an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition
or cancellation proceedings have been filed and may in the future be filed against certain of our trademarks, and our trademarks
may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing
them against third parties than we otherwise would.
Trademark protection
varies in accordance with local laws. Trademarks remain in force in some countries as long as the trademark is used and in other
countries as long as the trademark is registered. Trademark registrations generally are for fixed but renewable terms. We cannot
provide any assurances that any trademarks or service marks will be sufficient to prevent competitors from adopting similar names.
The adoption of similar names by competitors could impede our ability to build brand identity and may lead to customer confusion,
which could adversely affect our sales or profitability.
Risks Related to Our Indebtedness
Servicing our debt
will require significant amounts of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability
to make scheduled payments of the principal of, to pay interest on or to refinance the $460.0 million aggregate principal amount
of Convertible Notes that we issued in July 2016 or any other indebtedness we or our subsidiaries may incur in the future depends
on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business
may not generate cash flow from operations in the future sufficient to service our debt, including the Convertible Notes. If we
are unable to generate cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt
or obtaining additional equity capital on terms that may be unfavorable to us or highly dilutive. Our ability to refinance our
indebtedness will depend on the capital markets and our financial condition at the time we seek to refinance such indebtedness.
We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in
a default on our debt obligations.
We may incur substantially
more debt or take other actions that would affect our ability to pay the principal of and interest on our debt.
We and our subsidiaries
may be able to incur substantial additional debt in the future, some of which may be secured debt. We and our subsidiaries are
not restricted under the terms of the indenture governing the Convertible Notes or otherwise from incurring additional debt, securing
existing or future debt, recapitalizing our debt or taking other actions that could have the effect of diminishing our ability
to service our debt when due.
The accounting method
for convertible debt securities that may be settled in cash, such as the Convertible Notes, is the subject of recent changes that
could have a material effect on our reported financial results.
Under Accounting
Standards Codification Subtopic 470-20, “Debt with Conversion and Other Options” (“ASC 470-20”), an entity
must separately account for the liability and equity components of convertible debt instruments (such as the Convertible Notes)
that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest
cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included
in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the
equity component is treated as original issue discount for purposes of accounting for the debt component of the Convertible Notes.
As a result, we are required to record a greater amount of non-cash interest expense in current periods presented as a result of
the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible
Notes. Because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the
instrument’s coupon interest, we report lower net income in our financial results, which could adversely affect the market
price of our common stock and the market price of the Convertible Notes.
In addition,
under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly
in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion
of the Convertible Notes will not be included in the calculation of diluted earnings per share except to the extent that the conversion
value of the notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the
transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected
to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit
the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon
conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected.
Risks Related to Ownership of Our Common
Stock
Ownership in our common stock is
highly concentrated and your ability to influence corporate matters may be limited as a result.
Our executive
officers, directors and stockholders who own more than 5% of our outstanding common stock together beneficially own a significant
percentage of our common stock based on reports filed with the SEC. If these stockholders were to choose to act together, they
would be able to significantly influence matters submitted to our stockholders for approval, including the election of directors
and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization,
as well as our management and affairs. This concentration of voting power could delay or prevent an acquisition of us on terms
that other stockholders may desire. The interests of this group of stockholders may not always coincide with your interests or
the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of
other stockholders, including seeking a premium value for their common stock, and might affect the market price of our common stock.
We have a significant
stockholder, which will limit your ability to influence corporate matters, may give rise to conflicts of interest and could result
in future substantial sales of shares of our common stock into the market.
Genextra S.p.A.
(“Genextra”) is our largest stockholder and owns a significant minority percentage of our outstanding common stock.
Accordingly, Genextra exerts and will continue to exert significant influence over us and any action requiring the approval of
the holders of our common stock, including the election of directors and amendments to our organizational documents, such as increases
in our authorized shares of common stock and approval of significant corporate transactions. This concentration of voting power
makes it less likely that any other holder of common stock will be able to affect the way we are managed and could delay or prevent
an acquisition of us on terms that other stockholders may desire.
Furthermore,
the interests of Genextra may not always coincide with your interests or the interests of other stockholders, and Genextra may
act in a manner that advances its best interests and not necessarily those of other stockholders, including seeking a premium value
for its common stock, and might affect the market price of our common stock. Our board of directors, which consists of ten directors,
including one associated with Genextra, has the power to set the number of directors on our board from time to time.
Genextra also
may sell shares of our common stock into the market from time to time, and we cannot predict the effect, if any, that future sales
by Genextra may have on the market price of our common stock. In addition, Genextra has informed us that it has pledged its shares
of our common stock held prior to the Concurrent Private Placement to an affiliate of Credit Suisse Securities (USA) LLC as collateral
in connection with a margin loan. Enforcement against such collateral could materially and adversely affect the price of our common
stock.
An active trading market
in our common stock may not be maintained.
The trading
market in our common stock has been extremely volatile. The quotation of our common stock on the Nasdaq Global Select Market does
not assure that a meaningful, consistent and liquid trading market will exist. We cannot predict whether an active market for our
common stock will be maintained in the future. An absence of an active trading market could adversely affect your ability to sell
our common stock at current market prices in short time periods, or possibly at all. Additionally, market visibility for our common
stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock.
We have previously
been, and are currently, subject to securities class action litigation and may be subject to similar or other litigation in the
future. Such matters can be expensive, time-consuming and have a material adverse effect on our business, results of operations
and financial condition.
We have previously
been subject to securities class action lawsuits. In February 2014, two purported securities class actions were filed against us
and certain of our officers, which were eventually consolidated. In May 2016, the defendants reached an agreement with the lead
plaintiff to seek court approval of a proposed resolution and the settlement was ultimately granted final approval by the court
in September 2016. While the final judgment and order of the court included a dismissal of the action with prejudice against all
defendants and the defendants did not admit any liability as part of the settlement, the total payment aggregated to $55.0 million,
of which $10.0 million was paid by our insurers.
In September
2017, a lawsuit and, in January 2018, a follow-on lawsuit were filed alleging that we and certain of our officers made material misrepresentations and/or omissions of material fact regarding Ocaliva dosing, use and
pharmacovigilance-related matters, as well as our operations, financial performance and prospects. The plaintiffs seek unspecified
monetary damages on behalf of the putative class, an award of costs and expenses, including attorney’s fees, and rescissory
damages. While we believe that we have a number of valid defenses to the claims described above and intend to vigorously defend
ourselves, the matters are in the early stages of litigation and no assessment can be made as to the likely outcome of the matters
or whether they will be material to us.
We may be subject
to additional suits or proceedings brought in the future and, as has been the case with many companies in our industry, we may
from time to time receive inquiries and subpoenas and other types of information requests from government authorities and others.
While the ultimate outcome of any such investigations, inquiries, information requests and legal proceedings is difficult to predict,
adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices,
product recalls, costs and significant payments, which may have a material adverse effect on our business, results of operations
and financial condition. In addition, monitoring and defending against legal actions, whether or not meritorious, and responding
to investigations, inquiries and information requests is expensive, time-consuming for our management and detracts from our ability
to fully focus our internal resources on our business activities, and we cannot predict how long it may take to resolve such matters.
Although we may receive insurance coverage for certain adversarial proceedings, coverage could be denied or prove to be insufficient.
It is possible that we could, in the future, incur judgment or enter into settlement of claims for monetary damages. A decision
adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our business,
results of operations and financial condition.
Our stock price has
been and may in the future be volatile, which could cause holders of our common stock to incur substantial losses.
The market price
of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in response
to various factors, some of which are beyond our control. Since our initial public offering which occurred in October 2012, the
price of our common stock on the Nasdaq Global Select Market has ranged from $17.96 per share to $497.00 per share. In addition
to the other factors discussed in this “Risk Factors” section, elsewhere in this Quarterly Report on Form 10-Q and
in our Annual Report, these factors include:
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failure to successfully commercialize Ocaliva for PBC in the United States, Europe, Canada, Israel,
Australia and other jurisdictions in which we have or may receive marketing authorization or our inability to receive marketing
approval for Ocaliva in other jurisdictions;
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any issues, delays or failures in identifying patients, enrolling patients, treating patients or
completing and timely reporting the results of our NASH or PBC clinical trials;
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inability to obtain additional funding;
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any delay in filing an investigational new drug application, NDA, MAA or comparable submission
for any of our products or product candidates and any adverse development or perceived adverse development with respect to the
regulatory review of any such submission;
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failure to successfully develop and commercialize OCA for indications other than PBC or any of
our other product candidates;
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inability to obtain adequate product supply of OCA or any of our other product candidates or the
inability to do so at acceptable prices;
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results of clinical trials of our competitors’ products and product candidates;
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regulatory actions with respect to our products or product candidates or our competitors’
products or product candidates;
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changes in laws or regulations applicable to our products or product candidates;
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failure to meet or exceed financial projections or guidance we may provide to the public;
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failure to meet or exceed the estimates and projections of the investment community;
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actual or anticipated fluctuations in our financial condition and operating results;
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actual or anticipated changes in our growth rate relative to our competitors;
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actual or anticipated fluctuations in our competitors’ operating results or changes in their
growth rate;
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competition from existing products or new products that may emerge;
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announcements by us, our collaborators or our competitors of significant acquisitions, strategic
collaborations, joint ventures, collaborations or capital commitments;
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issuance of new or updated research or reports by securities analysts;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
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additions or departures of key management or scientific personnel;
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disputes or other developments related to proprietary rights, including patents, litigation matters
and our ability to obtain patent protection for our technologies;
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announcement or expectation of additional financing efforts;
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significant legal disputes, investigations or proceedings involving us, including patent, stockholder
or product liability litigation;
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sales of our common stock by us, our insiders or our other stockholders;
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failure to adopt appropriate information security systems, including any systems that may be required
to support our growing and changing business requirements, or prevent system failures, data breaches or violations of data protection
laws;
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market conditions for biopharmaceutical stocks in general; and
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general economic, industry and market conditions.
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Furthermore,
stock markets in general and the market for biotechnology companies in particular have experienced extreme price and volume fluctuations
that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have
been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations,
as well as general economic, political and market conditions such as recessions, interest rate changes or international currency
fluctuations may negatively impact the market price of shares of our common stock, regardless of our actual operating performance.
In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class
action litigation. We have been in the past, and are currently the target of this type of litigation, which could result in substantial
costs and divert our management’s attention from other business concerns, which could seriously harm our business. As a result
of this volatility, you could incur substantial losses.
In addition,
pursuant to the Securities Purchase Agreement, the Private Placement Purchasers have the right, subject to certain conditions,
to require us to file a registration statement covering the sale of their shares of our common stock purchased in the Concurrent
Private Placement. Once we register the offer and sale of these shares, the shares can be freely sold in the public market.
If our stockholders
sell substantial amounts of our common stock, the market price of our common stock may decline even if our business is doing well.
A significant
number of shares of our common stock are held by a small number of stockholders, including Genextra. Sales of a significant number
of shares of our common stock, or the expectation that such sales may occur, could significantly reduce the market price of our
common stock.
These sales, or the possibility that these sales may occur, also might make it more
difficult for us to sell equity securities in the future at a time and price that we deem appropriate. We have also registered
the offer and sale of all of the shares of common stock that we may issue under our equity compensation plans, including upon the
exercise of stock options. These shares can be freely sold in the public market upon issuance.
Additionally,
sales of our common stock by our executive officers or directors, even when done during an open trading window under our policies
with respect to insider sales or done under a trading plan adopted in accordance with the guidelines set forth by Rule 10b5-1,
may adversely impact the market price of our common stock. Although we do not expect that the relatively small volume of such sales
would itself significantly impact the market price of our common stock, the market could react negatively to the announcement of
such sales, which could in turn affect the market price of our common stock. Furthermore, Genextra has informed us that it has
pledged its shares of our common stock held prior to the Concurrent Private Placement to an affiliate of Credit Suisse Securities
(USA) LLC as collateral in connection with a margin loan. Enforcement against such collateral could materially and adversely affect
the market price of our common stock.
Our disclosure controls
and procedures may not prevent or detect all errors or acts of fraud.
We are subject
to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure
that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated
to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent
limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system,
misstatements or insufficient disclosure due to error or fraud may occur and not be detected.
You may experience
future dilution as a result of future equity offerings or strategic transactions.
We may raise additional
funds through the issuance and sale of additional shares of our common stock or other securities convertible into or exchangeable
for our common stock. For example, in April 2018, we issued and sold an aggregate of 4,257,813 shares of common stock and in July
2016, we issued and sold $460.0 million of Convertible Notes. Conversions of the Convertible Notes dilute the ownership interests
of existing shareholders to the extent that we elect to deliver shares of our common stock (or a combination of cash and shares
of our common stock) in connection therewith. In addition, the existence of the Convertible Notes may encourage short selling by
market participants because the conversion of the Convertible Notes could depress the price of our common stock. We may also issue
shares of common stock, stock options, restricted stock, restricted stock units or other stock-based awards under our existing
or future equity incentive plans or other employee or director compensation plans. The issuance of additional shares of common
stock (including pursuant to conversions of the Convertible Notes) or other securities convertible into or exchangeable for our
common stock, or the perception that such issuances may occur, may materially and adversely affect the price of our common stock.
If securities or industry
analysts cease publishing research or reports about us, our business or our market, or if they publish inaccurate or unfavorable
reports about us or our common stock, the price of our common stock and its trading volume could decline.
The market for
our common stock depends in part on the research and reports that securities or industry analysts publish about our company. We
do not have any control over these analysts, and there can be no assurance that analysts will continue to cover us or provide favorable
coverage. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research
about our business, our stock price would likely decline. If one or more of the analysts covering us fail to regularly publish
reports on us, demand for our common stock could decline, which could cause our stock price and trading volume to decline.
Anti-takeover provisions
in our restated certificate of incorporation and our restated bylaws, as well as provisions of Delaware law and certain provisions
of the Convertible Notes, might discourage, delay or prevent a change in control of our company or changes in our management and,
therefore, depress the market price of our common stock.
Provisions in
our restated certificate of incorporation and restated bylaws, as well as provisions of Delaware law, contain provisions that may
discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including
transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent
or frustrate attempts by our stockholders to replace or remove our management. Our corporate governance documents include provisions:
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authorizing the issuance of “blank check” convertible preferred stock, the terms of
which may be established and shares of which may be issued without stockholder approval;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to
be taken at a meeting of our stockholders, to the extent that no stockholder, together with its affiliates, holds more than 50%
of our voting stock;
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eliminating the ability of stockholders to call a special meeting of stockholders;
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permitting our board of directors to accelerate the vesting of outstanding equity awards upon certain
transactions that result in a change of control; and
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establishing advance notice requirements for nominations for election to the board of directors
or for proposing matters that can be acted upon at stockholder meetings.
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In addition,
as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation
Law (the “DGCL”), which prevents some stockholders holding more than 15% of our outstanding common stock from engaging
in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision
of our restated certificate of incorporation or restated bylaws or Delaware law that has the effect of delaying or deterring a
change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and
could also affect the price that some investors are willing to pay for our common stock.
Certain
provisions of the Convertible Notes could also make it more difficult or more expensive for a third party to acquire us. For example,
if an acquisition event constitutes a “fundamental change” under the terms of the Convertible Notes, holders of the
Convertible Notes will have the right to require us to purchase their Convertible Notes for cash. Similarly, if an acquisition
event constitutes a “make-whole fundamental change” under the terms of the Convertible Notes, we may be required to
increase the conversion rate for holders who convert their Convertible Notes in connection with such make-whole fundamental change.
The existence
of the foregoing provisions and anti-takeover measures may also frustrate or prevent any attempts by our stockholders to replace
or remove our current management or members of our board of directors and could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing
the likelihood that you could receive a premium for your common stock in an acquisition.
Claims for indemnification
by our directors and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce
the amount of money available to us.
As permitted
by Section 102(b)(7) of the DGCL, our restated certificate of incorporation limits the liability of our directors to the fullest
extent permitted by law. In addition, as permitted by Section 145 of the DGCL, our restated certificate of incorporation and restated
bylaws provide that we shall indemnify, to the fullest extent authorized by the DGCL, each person who is involved in any litigation
or other proceeding because such person is or was a director or officer of our company, or is or was serving as an officer or director
of another entity at our request, against all expense, loss or liability reasonably incurred or suffered in connection therewith.
Our restated certificate of incorporation provides that the right to indemnification includes the right to be paid expenses incurred
in defending any proceeding in advance of its final disposition, subject to certain conditions. The rights conferred in the restated
certificate of incorporation and the restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements
with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.
The above limitations
on liability and our indemnification obligations limit the personal liability of our directors and officers for monetary damages
for breach of their fiduciary duty as directors by shifting the burden of such losses and expenses to us. Although we carry directors’
and officers’ liability insurance, certain liabilities or expenses covered by our indemnification obligations may not be
covered by such insurance or the coverage limitation amounts may be exceeded. As a result, we may need to use a significant amount
of our funds to satisfy our indemnification obligations, which could severely harm our business and financial condition and limit
the funds available to stockholders who may choose to bring a claim against our company.
We do not intend to
pay dividends in the foreseeable future.
We do not anticipate
paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders,
which may not occur. Investors seeking cash dividends should not invest in our common stock. You may not realize any return on
your investment in our common stock and may lose some or all of your investment.
Our ability to use
our net operating loss carryforwards and certain other tax attributes may be limited.
We have significant
net operating loss carryforwards (“NOLs”) for U.S. Federal income tax purposes, which expire between 2024 and 2037.
We also have certain state and foreign NOLs in varying amounts depending on the different state and foreign tax laws.
Our ability
to utilize our NOLs may be limited under Section 382 of the Internal Revenue Code or similar rules. The Section 382 limitations
apply if an “ownership change” occurs. Generally, an ownership change occurs when certain shareholders increase their
aggregate ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three
years). We have evaluated whether one or more ownership changes under Section 382 have occurred since our inception and have determined
that there have been at least two such changes. Although we believe that these ownership changes have not resulted in material
limitations on our ability to use these NOLs, our ability to utilize these NOLs may be limited due to future ownership changes
or for other reasons. Additionally, tax laws limit the time during which NOLs and certain other tax attributes may be utilized
against future taxes. As a result, we may not be able to take full advantage of our carryforwards for U.S. federal, state, and
foreign tax purposes.