Risks Related to Financial Condition
We have incurred significant losses since inception and anticipate that we will incur losses for the foreseeable future. To date we have not generated any revenue or profit from product sales and we may never achieve or sustain profitability.
We received FDA approval for NUZYRA in October 2018 and plan to launch NUZYRA in the United States in February 2019. Additionally, FDA approval was granted in October 2018 for SEYSARA, which Almirall has rights to commercialize and with respect to which we will be entitled to tiered royalties. Although the FDA approved NUZYRA and SEYSARA, it will take some time to attain profitability and we may never do so. Our net loss for the nine months ended September 30, 2018 was $89.6 million. As of September 30, 2018, our accumulated deficit was $559.7 million. We expect to continue to incur losses for the foreseeable future as we seek to maintain and expand regulatory approvals for our products, commercialize NUZYRA, establish our sales, marketing and distribution infrastructure to commercialize products for which we obtain marketing approval, including NUZYRA, and add personnel to support our product development and commercialization efforts and operations. The net losses and negative operating cash flows incurred to date, together with expected future losses, have had, and likely will continue to have, an adverse effect on our stockholders
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equity and working capital. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to generate any product revenues or achieve profitability. For example, our expenses could increase if we are required by regulatory agencies outside of the United States to perform studies in addition to those that we have already performed or currently expect to perform.
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To become and remain profitable, we must succeed in developing and
commercializing products with significant market potential. This will require us to be successful in a range of challenging activities, including manufacturing, marketing and commercializing approved products, such as NUZYRA, developing product candidates
and obtaining regulatory approval for them. We may never succeed in these activities and may never generate revenue from product sales that is significant enough to achieve profitability. Even if we achieve profitability in the future, we may not be able t
o sustain profitability in subsequent periods. Our failure to become or remain profitable would depress the market value of our common stock, could impair our ability to raise capital, expand our business, develop other product candidates or continue our o
perations and could cause investors to lose all or part of their investments.
We will continue to require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not available, may require us to delay, scale back or cease our product development programs or commercialization efforts for NUZYRA.
As of September 30, 2018, our cash, cash equivalents and marketable securities were $310.9 million. We will require substantial additional funding to meet FDA post-marketing approval requirements for NUZYRA, to complete the commercialization of NUZYRA, to fund the development of omadacycline in other indications, and to advance the development of our other product candidates, and such funding may not be available on favorable terms or at all. Although it is difficult to predict our liquidity requirements, based upon our current operating plan, we anticipate that our cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months from the filing date of this Quarterly Report on Form 10-Q. Because the profitability of NUZYRA and SEYSARA, and the successful development of any other future product candidates, is uncertain, we are unable to estimate the actual funds we will require to fund our continuing operations, including for our clinical development programs and commercialization efforts for NUZYRA.
Our future funding requirements will depend on many factors, including but not limited to:
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the costs and timing of commercialization activities for NUZYRA;
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product revenue, if any, received from commercial sales of NUZYRA;
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royalty revenue, if any, received from commercial sales of SEYSARA by Almirall;
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the ability of Zai to develop, manufacture and commercialize omadacycline in the Zai territory;
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the scope, progress, timing, cost and results of research, preclinical development and clinical trials;
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the costs, timing and outcome of seeking, obtaining, maintaining and expanding FDA and non-U.S. regulatory approvals;
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the costs associated with manufacturing and establishing sales, marketing and distribution capabilities;
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the number and characteristics of other product candidates that we may pursue;
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our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make in connection with the licensing, filing, defense and enforcement of any patents or other intellectual property rights;
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our need to hire additional management, scientific, commercial, operations and medical personnel;
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the effect of competing products that may limit market penetration of our products;
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our need to implement additional internal systems and infrastructure, including financial and reporting systems
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resources required to develop and implement policies and processes to promote ongoing compliance with applicable healthcare laws and regulations;
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costs required to ensure that our and our partners’ business arrangements with third parties comply with applicable healthcare laws and regulations; and
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the economic and other terms, timing and success of our existing licensing arrangements and any collaboration, licensing, or other arrangements into which we may enter in the future, including the timing of receipt of any milestone or royalty payments under these agreements.
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Until we generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through a combination of public or private equity offerings, debt or other structured financings, strategic collaborations and grant funding. There can be no assurance that we would be successful in securing additional funds on
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acceptable terms.
If additional funds are not available, we may be forced to cease operations, significantly reduce operating expenses or delay, curtail or eliminate one or more of our development programs or our business operations.
Raising additional capital or entering into certain other arrangements may cause dilution to our stockholders, restrict our operations or require us to relinquish rights.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs primarily through the sale of additional equity or convertible debt securities, which would dilute shareholder ownership interest. The terms of these new securities may include liquidation or other preferences that adversely affect shareholders
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rights as common stockholders. Future debt financing, if available at all, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, NUZYRA, SEYSARA, other product candidates or future revenue streams, or grant licenses on terms that are not favorable to us. We cannot assure you that we will be able to obtain additional funding if and when necessary. If we are unable to obtain adequate financing on a timely basis, we could be required to grant rights to develop and market NUZYRA, SEYSARA or our other product candidates that we may otherwise prefer to develop and market ourselves.
Our level of indebtedness and debt service obligations could adversely affect our financial condition and may make it more difficult for us to fund our operations.
On September 30, 2015, we entered into a Loan and Security Agreement, or the Loan Agreement, with Hercules Technology II, L.P. and Hercules Technology III, L.P., together, Hercules, and certain other lenders and Hercules Technology Growth Capital, Inc. (as agent). We have executed five amendments to the Loan Agreement subsequent to September 30, 2015, providing access to term loans with an aggregate principal amount of up to $90.0 million. As of September 30, 2018, we have drawn down on $70.0 million.
The two remaining tranches of up to $10.0 million each ($20.0 million total), or the Additional Tranches, may be available to the Company, subject to determination by Hercules, in its sole discretion, whether to provide such tranches. As such there can be no assurance as to whether or not the Additional Tranches shall be funded. The latest amendment extended the date on which the Company is required to begin making monthly principal installments on loans previously outstanding under the Hercules Loan Agreement, or the Prior Tranches, from January 1, 2019 to January 1, 2021, subject to the Company’s receipt of marketing approval for the Company’s lead product candidate, omadacycline, or the Interest Only Period Extension Event, which was obtained on October 2, 2018. Beginning on January 1, 2021, the Company is obligated to make payments in equal monthly installments of principal and interest with respect to the Prior Tranches. The Prior Tranches mature on September 1, 2021, due to the achievement of the Interest Only Extension Event. With respect to the $10 million loan made to the Company upon the execution of the fifth amendment, the Company is obligated to make payments in equal monthly installments of principal and interest beginning on September 1, 2020 (subject to extension to March 1, 2021 or September 1, 2021) upon achievement of specified levels of omadacycline revenue, and such loan matures on August 1, 2022.
All obligations under the Loan Agreement, as amended, are secured by substantially all of our existing property and assets, excluding our intellectual property. This indebtedness may create additional financing risk for us, particularly if our business or prevailing financial market conditions are not conducive to paying off or refinancing our outstanding debt obligations at maturity. This indebtedness could also have important negative consequences, including:
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we will need to repay our indebtedness by making payments of interest and principal, which will reduce the amount of money available to finance our operations, our research and development efforts and other general corporate activities; and
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our failure to comply with the affirmative, restrictive or financial covenants in the Loan Agreement, as amended, could result in an event of default that, if not cured or waived, could result in the acceleration of our obligation to repay this indebtedness, and Hercules could seek to enforce its security interest in the assets securing such indebtedness.
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To the extent additional debt (including without limitation the Additional Tranches) is added to our current debt levels, the risks described above could increase.
We may not have cash available to us in an amount sufficient to enable us to make interest or principal payments on our indebtedness when due.
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Failure to satisfy our current and future debt obligations under the Loan Agreement, as amended, could result in an event of default and, as a result,
Hercules could accelerate all of the amounts due. In the event of an acceleration of amounts due under the Loan Agreement, as amended, as a result of an event of default, we may not have sufficient funds or may be unable to arrange for additional financing
to repay our indebtedness. In addition, Hercules could seek to enforce its security interests in the assets securing such indebtedness.
We are subject to certain restrictive covenants which, if breached, could have a material adverse effect on our business and prospects.
The Loan Agreement, as amended, imposes operating and other restrictions on us. Such restrictions will affect, and in many respects limit or prohibit, our ability and the ability of any future subsidiary to, among other things:
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dispose of certain assets;
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change our lines of business;
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engage in mergers or consolidations;
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incur additional indebtedness;
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create liens on assets;
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pay dividends and make distributions or repurchase our capital stock; and
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engage in certain transactions with affiliates.
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Risks Related to Maintaining and Expanding Regulatory Approval and Other Legal Compliance Matters
If clinical trials for omadacycline for the treatment of UTI, are prolonged, delayed or stopped, we may be unable to obtain regulatory approval and commercialize omadacycline for the treatment of UTI on a timely basis.
In October 2018, the FDA approved NUZYRA in the United States for the treatment of adults with CABP and ABSSSI that are proven or strongly suspected to be caused by susceptible bacteria. We have a Phase 2 program currently in process to evaluate omadacycline for the treatment of UTI. Enrollment has commenced for the first of two planned Phase 2 clinical studies. The first study will evaluate the efficacy, safety, tolerability and pharmacokinetics of omadacycline in female patients with cystitis, a common uncomplicated UTI. The second study, which we intend to initiate in the fourth quarter of 2018, will evaluate the efficacy, safety, tolerability and pharmacokinetics of omadacycline in patients with acute pyelonephritis, a common complicated UTI. The completion of these planned clinical trials could be substantially delayed or prevented by several factors, including:
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delay or failure to obtain sufficient supplies of the product candidate for our clinical trials;
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delay or failure to obtain sufficient supplies of the comparator antibiotic for our clinical trials;
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the limited number of, and competition for, suitable sites to conduct our clinical trials, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as our product candidates;
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any delay or failure to obtain regulatory approval or agreement to commence a clinical trial in any of the countries where enrollment is planned;
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clinical holds on, or other regulatory objections to, a new or ongoing clinical trial;
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delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites or clinical research organizations, or CROs, or local regulatory authorities, the terms of which can be subject to extensive negotiation and may vary significantly among different sites or CROs; and
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delay or failure to obtain Institutional Review Board/ethics committee approval to conduct a clinical trial at a prospective site or within a specific region or country.
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The completion of our clinical trials could also be substantially delayed or prevented by several factors, including:
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slower than expected rates of patient recruitment and enrollment;
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failure of patients to complete the clinical trial;
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unforeseen safety issues, including severe or unexpected drug-related adverse effects experienced by patients;
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lack of omadacycline efficacy evidenced during clinical trials;
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termination of our clinical trials by one or more clinical trial sites;
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inability or unwillingness of patients or clinical investigators to follow our clinical trial protocols;
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inability to monitor patients adequately during or after treatment by us and/or our CROs; and
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the need to repeat or terminate clinical trials as a result of inconclusive or negative results or unforeseen complications during clinical trial testing.
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In particular, our ability to enroll patients in our clinical trials in sufficient numbers and on a timely basis will be subject to a number of factors, including the size of the patient population needed, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant indication and the eligibility criteria for the clinical trial. For example, in the Phase 2 clinical trials of omadacycline in UTI, patients who have previously taken potentially effective antibiotics for the treatment of an infection within 72 hours of receiving the first dose of study medication will be excluded from the clinical trial. Depending upon a region
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s or a clinical site
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s standard of care for the administration of antibiotics, this could affect our ability to enroll patients in these clinical trials in a timely fashion.
Changes in regulatory requirements and guidance may also occur, and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us to resubmit clinical trial protocols to regulatory agencies/ Institutional Review Boards/ethics committees for re-examination, which may impact the costs, timing or successful completion of a clinical trial. Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, the Institutional Review Board overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site or us due to a number of factors, including:
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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
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unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks;
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lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions; and
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upon a breach or pursuant to the terms of any agreement with, or for any other reason by, current or future collaborators that have responsibility for the clinical development of any of our product candidates.
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In addition, clinical practices vary globally, and there is a lack of harmonization among the guidance provided by various regulatory bodies of different regions and countries with respect to the data that is required to receive marketing approval, which makes designing global trials increasingly complex. Differing regulatory approval requirements in different countries also make it more difficult for us to conduct unified global trials, which can lead to increased development costs and marketing delays or non-viability of our clinical trials. The approval procedure and the time required to obtain approval also varies among countries. Furthermore, regulatory agencies may have varying interpretations of the same data, and approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions.
Any failure or significant delay in completing clinical trials for omadacycline for the treatment of UTI would adversely affect our ability to expand regulatory approval of NUZYRA and our commercial prospects and ability to generate product revenue for sales of NUZYRA in such indication will be diminished.
The results of previous clinical trials may not be predictive of future results, and the results of any future clinical trials may not satisfy the requirements of the FDA or non-U.S. regulatory authorities.
Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or our partners may decide, or regulators may require us, to conduct additional clinical or preclinical testing which could delay submission of a supplemental NDA, or sNDA, and regulatory approval. We will be required to demonstrate with substantial evidence through well-controlled clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale. Success in early stage clinical trials does not mean that future larger registration clinical trials will be successful, because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and non-U.S. regulatory authorities despite having progressed through early stage clinical trials. Product candidates that have shown promising results in early-stage (pre-Phase 3) clinical trials may still suffer significant setbacks in subsequent registration clinical trials.
In addition, the design of a clinical trial can determine whether its results will support approval of a product and/or new indications. and flaws in the design of a clinical trial may not become apparent until the clinical trial is underway, well advanced or completed. Further, if future product candidates are found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for them and our business would be harmed. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier stage clinical trials.
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Positive results in our randomized Phase 2 and Phase 3 clinical studies of omadacycline in complicated skin and skin structure infections, ABSSSI and CABP, may not be predictive of the results in any other indications, such
as omadacycline for the treatment of UTI. In some instances, there can be significant variability in safety and/or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in clinical trial
protocols, differences in size, type and geographic distribution of the patient populations, adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. We do not know whether any Phase 2,
Phase 3 or other clinical trials we or any of our collaborators may conduct, or have conducted in the past, will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our future product candidates.
Further, our and our partners
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product candidates may not be approved even if they achieve their primary endpoints in Phase 3 clinical trials or registration trials. The FDA or other non-U.S. regulatory authorities may disagree with our clinical trial design and our interpretation of data from preclinical studies and clinical trials even when we have Special Protocol Assessment agreements. In addition, any of these regulatory authorities may change requirements for the approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal Phase 3 clinical trial that has the potential to result in FDA or other agencies
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approval. In addition, any of these regulatory authorities may also approve a product candidate for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-marketing clinical trials. In addition, the FDA or other non-U.S. regulatory authorities may not approve the labeling claims that we believe would be supported by the clinical data, or be necessary or desirable for the successful commercialization of our products.
If an unforeseen safety issue arises, the FDA always has the option to initiate a REMS or add additional warnings to a product label upon approval.
The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our partners from obtaining approvals for the commercialization of our product candidates.
The research, testing, manufacturing, labeling, approval, selling, marketing and distribution of drug products are subject to extensive regulation by the FDA and other U.S. and non-U.S. regulatory authorities. Regulations differ from country to country, which will require us to expend additional resources in each market for which a separate regulatory approval is required. We are not permitted to market our product candidates outside of the United States until we receive marketing approval from applicable regulatory authorities outside of the United States. Although omadacycline and sarecycline received FDA approval, approval of other indications, including treatment of UTI with omadacycline, is subject to the risks of failure inherent in drug development.
Failure to comply with FDA and non-U.S. regulatory requirements may, either before or after product approval, if any, subject us to administrative or judicially imposed sanctions, including:
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restrictions on the products, manufacturers or manufacturing process;
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civil and criminal penalties;
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suspension or withdrawal of regulatory approvals;
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product seizures, detentions or import bans;
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voluntary or mandatory product recalls and publicity requirements;
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total or partial suspension of production;
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imposition of restrictions on operations, including costly new manufacturing requirements; and
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refusal to approve pending NDAs or supplements to approved NDAs.
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The FDA and foreign regulatory authorities also have substantial discretion in the drug approval process. The number of preclinical studies and clinical trials that will be required for regulatory approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address, and the regulations applicable to any particular drug candidate. Regulatory agencies can delay, limit or deny approval of a product candidate for many reasons, including:
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a product candidate may not be deemed safe or effective;
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the results may not confirm the positive results from earlier preclinical studies or earlier stage clinical trials;
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regulatory agencies may not find the data from preclinical studies and clinical trials sufficient;
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regulatory agencies might not approve our third-party manufacturer
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s processes or facilities;
or
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regulatory agencies may change their approval policies or adopt new regulations.
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Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability to generate revenue from omadacycline or any other particular product candidate, which likely would result in significant harm to our financial position. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. These limitations may limit the size of the market opportunity for the product.
Even though NUZYRA and SEYSARA have been approved by the FDA in the United States, they face future post-approval development and regulatory requirements, which may limit how they are manufactured and marketed, and could materially impair our ability to generate revenue.
In October 2018, the FDA approved NUZYRA in the United States for the treatment of adults with CABP and ABSSSI that are proven or strongly suspected to be caused by susceptible bacteria, as well as SEYSARA for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients nine years of age and older. NUZYRA and SEYSARA will be subject to, among other things, ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping and submission of safety, efficacy and other post-market information. As part of the FDA approval for NUZYRA, we are required to conduct post-marketing pediatric studies, including a single dose pharmacokinetic and safety study in children ages eight to seventeen who are receiving antibacterial drug therapy for an infectious disease, an active-controlled safety study in children ages eight to seventeen who have acute bacterial skin and skin structure infections, and an active-controlled safety study in children ages eight to seventeen who have CABP. In addition, we are also required to conduct an active-controlled safety and efficacy study in adults with CABP and a U.S. surveillance study for five years from the date of marketing to determine if resistance to NUZYRA has developed in those organisms specific to the indications in the label. In addition, approved products, manufacturers and manufacturers
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facilities are required to comply with extensive FDA and other regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP, regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. As such, we and our partners and any of our and their respective contract manufacturers will be subject to ongoing review and periodic inspections to assess compliance with cGMPs. Additionally, to the extent we want to make certain changes to the approved products, product labeling, or manufacturing processes, we will need to submit new applications or supplements to FDA and obtain the agency’s approval.
Accordingly, we and others with whom we work will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our products, including NUZYRA. We and our partners will also be required to report adverse reactions and production problems, if any, to the FDA and to comply with requirements concerning, among other things, advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product
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s approved label. Although the FDA and other regulatory agencies do not regulate a physician’s choice of drug treatment made in the physician’s independent medical judgment, they do restrict promotional communications from pharmaceutical companies or their sales force with respect to off-label uses of products for which marketing clearance has not been issued. Accordingly, we and our partners will not be able to promote our products for indications or uses for which they are not approved. A company that is found to have promoted off-label use of its product may be subject to significant liability, including civil and criminal sanctions. We intend to comply with the requirements and restrictions of the FDA and other regulatory agencies with respect to off-label promotion, but we cannot be sure that the FDA or other regulatory agencies will agree that we have not violated their restrictions. As a result, we may be subject to criminal and civil liability. If the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of a qui tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses, we could be subject to substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Additionally, if a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may impose restrictions on that product, us or our partners, including requiring withdrawal of the product from the market. If we or our partners fail to comply with the regulatory requirements of the FDA and other U.S. and non-U.S. regulatory authorities, or if previously unknown problems with our products, manufacturers or manufacturing processes are discovered, the FDA or other regulatory authorities could impose significant penalties, such as:
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issuance of warning letters or untitled letters;
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imposition of injunctions or civil or criminal penalties;
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imposition of fines, restitution or disgorgement of profits or revenue;
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suspension or withdrawal of regulatory approval;
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restrictions on product distribution or use;
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imposition of total or partial suspension of production;
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suspension of any ongoing clinical trials;
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requirements to conduct post-marketing clinical trials;
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refusal to approve pending applications or supplements to applications;
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restrictions on the labeling or marketing of a product;
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imposition of restrictions on operations, including costly new manufacturing requirements; or
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seizure or detainment of products or requirements for us or our partners to initiate a product recall.
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If we and our partners are not able to maintain regulatory compliance, we may not achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.
Our products may have undesirable side effects that may require them to be taken off the market or otherwise limit their sales.
Although NUZYRA and SEYSARA have undergone safety testing in humans and in laboratory animals, not all adverse effects of drugs can be predicted or anticipated from these preclinical safety and toxicology studies. Unforeseen side effects from either NUZYRA or SEYSARA could arise after the approved product has been marketed. Many of the most widely used antibiotics are associated with treatment-limiting adverse events, including in some instances, kidney damage, allergic reactions or sudden cardiovascular death due to cardiac arrhythmia. To date, we have conducted more than 20 Phase 1 studies of omadacycline. We have also conducted and completed three Phase 3 clinical studies, which all resulted in omadacycline demonstrating positive efficacy results. The results of future clinical trials may show that NUZYRA or SEYSARA, or any other current or future product candidate, cause undesirable or unacceptable side effects. Furthermore, even though both NUZYRA and SEYSARA have received marketing approval, if we or others later identify undesirable or unacceptable side effects caused by NUZYRA or SEYSARA:
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regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
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we or our partners may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;
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we or our partners may be subject to limitations on how we may promote the product;
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sales of the product may decrease significantly;
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regulatory authorities may withdraw approvals of an approved product, or otherwise require us or our partners to take our approved product off the market, or impose restrictions on its distribution;
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we or our partners may be subject to litigation or product liability claims and be held liable for harm caused to patients; and
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our reputation may suffer.
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Any of these events could prevent us, our current partners or our potential future partners from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of our products. Furthermore, once NUZYRA and SEYSARA are commercially available, each may be used in a wider population and in a less rigorously controlled environment than in clinical studies. As a result, regulatory authorities, healthcare practitioners, third-party payors or patients may perceive or conclude that the use of the product is associated with previously unknown serious adverse effects, undermining commercialization efforts.
Coverage and reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, it is less likely that our products will be widely used.
Market acceptance and sales of NUZYRA, SEYSARA and any of our or our partners
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other products will depend on coverage and reimbursement policies. Government authorities and third-party payors, such as private health plans, decide which drugs they will cover and establish reimbursement levels. Coverage and reimbursement may vary among third-party payors. Coverage may not be
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available, and reimbursement may not be adequate for NUZYRA, SEYSARA or any other products that we or our partners develop and commercialize. Also, coverage and reimbursement policies may reduce the demand for, or
the price paid for, our or our partners
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products. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with t
heir prescription drugs. Patients are unlikely to use our or our partners
’
products unless coverage is provided, and reimbursement is adequate to cover a significant portion of the cost of such products. Therefore, if coverage is not available or reimburse
ment is limited, we and our partners may not be able to successfully commercialize NUZYRA, SEYSARA or any future approved products, if any.
Third-party payors may limit coverage or impose conditions on coverage. For example, third-party
payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the FDA-approved drugs for a particular indication. As another example, third-party payors may require use of alternative therapies or a demonstration that a product is medically necessary for a particular patient before use of a product will be covered. A decision by a third-party payor not to cover our products could reduce utilization of those products.
A third-party payor
’
s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Third-party payors frequently require drug companies to negotiate agreements that provide discounts or rebates from list prices. We may be required to provide such discounts and rebates to some third-party payors in relation to our product(s). There is no guarantee that we would be able to negotiate agreements with third-party payors at price levels that are profitable to us, or at all. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.
Outside of the United States, in some countries, the pricing of prescription drugs is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take a significant amount of time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. In some countries, we or our partners may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to other available products in order to obtain or maintain reimbursement or pricing approval. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, there could be a material adverse effect on our business.
Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.
The United States and several foreign jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our or our partners
’
ability to sell approved products profitably. Among policymakers 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.
The U.S. government and individual states have aggressively pursued healthcare reform, as evidenced by the passing of the Healthcare Reform Act and the ongoing efforts to modify or repeal that legislation. The Healthcare Reform Act substantially changed the way healthcare is financed by both governmental and private insurers and contains a number of provisions that affect coverage and reimbursement of drug products and/or that could potentially reduce the demand for pharmaceutical products such as increasing drug rebates under state Medicaid programs for brand name prescription drugs and extending those rebates to Medicaid managed care and assessing a fee on manufacturers and importers of brand name prescription drugs reimbursed under certain government programs, including Medicare and Medicaid. Other aspects of healthcare reform, such as expanded government enforcement authority could also affect our business. Modifications have been implemented under the Trump Administration and additional modifications or repeal may occur. For instance, tax reform legislation was enacted at the end of 2017 that eliminated the individual health insurance mandate which is expected to increase the number of Americans without comprehensive health insurance. See
“
Government Regulation - Health Care and Other Reform
” in our Annual Report on Form 10-K
for the year ended December 31, 2017, as filed with the SEC on March 6, 2018. We cannot predict the ultimate content, timing or effect of any changes to the Healthcare Reform Act or other federal and state reform efforts.
Additional legislative actions to control U.S. healthcare or other costs have passed. The Budget Control Act, as amended, resulted in the imposition of 2% reductions in Medicare (but not Medicaid) payments to providers in 2013 and will remain in effect through 2027 unless additional Congressional action is taken.
There is no assurance that federal or state healthcare reform or other legislative and regulatory initiatives will not adversely affect our business and financial results, and we cannot predict how future federal or state legislative, judicial or administrative changes relating to healthcare reform will affect our business.
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In the United States there is increasing scrutiny of drug prices and federal or state reforms could impact our ability to establish what we believe is a fair price for our products, and ultimately diminish our reven
ue prospects.
Recently, there has been considerable public and government scrutiny in the United States of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals. There have also been several recent state legislative efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices or price increases. Adoption of new legislation at the federal or state level could affect demand for, or pricing of, our product candidates, if approved for sale and could diminish our ability to establish what we believe is a fair price for our products, ultimately diminishing our revenue for our products.
If we participate in and then fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the United States, we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
With the approval of NUZYRA, we anticipate that we will need to participate in the Medicaid Drug Rebate Program and a number of other federal and state government pricing programs in the Unites States in order to obtain coverage for the product by certain government healthcare programs. These programs would generally require us to pay rebates or provide discounts to certain private purchasers or government payers in connection with our products when dispensed to beneficiaries of these programs. In some cases, such as with the Medicaid Drug Rebate Program, the rebates are based on pricing and rebate calculations that we report on a monthly and quarterly basis to the government agencies that administer the programs. The terms, scope and complexity of these government pricing programs change frequently. We may also have reimbursement obligations or be subject to penalties if we fail to provide timely and accurate information to the government, pay the correct rebates or offer the correct discounted pricing. Changes to the price reporting or rebate requirements of these programs would affect our obligations to pay rebates or offer discounts. Responding to current and future changes may increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations.
If we or our partners market products in a manner that violates fraud and abuse and other healthcare laws, or if we or our partners violate government price reporting laws, we or our partners may be subject to administrative civil and/or criminal penalties.
Within the United States, several other types of state and federal healthcare laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. When we or any of our partners market approved products, such as NUZYRA or SEYSARA, some of our or our partners’ business activities could possibly be subject to challenge under one or more of these laws. The laws and regulations that may affect our ability to operate include:
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federal false claims, false statements and civil monetary penalties laws prohibiting, among other things, any person from knowingly presenting, or causing to be presented, a false claim for payment of government funds or knowingly making, or causing to be made, a false statement to get a false claim paid;
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federal healthcare program anti-kickback laws, which prohibit, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid;
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the federal law known as HIPAA, which, in addition to privacy protections applicable to healthcare providers and other entities, prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
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the FDCA, which among other things, strictly regulates drug marketing, prohibits manufacturers from marketing such products for off-label use and regulates the distribution of samples;
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federal laws that require pharmaceutical manufacturers to report certain calculated product prices to the government or provide certain discounts or rebates to government authorities or private entities, often as a condition of reimbursement under government healthcare programs;
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the so-called
“
federal sunshine
”
law, which requires pharmaceutical and medical device companies to monitor and report certain financial interactions with certain healthcare providers to the federal government for re-disclosure to the public; and
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state law equivalents of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, state laws regulating interactions between pharmaceutical manufactures and healthcare providers, and state laws governing the privacy and security of health
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information in certain circumstances, many of which d
iffer from each other in significant ways and often are not preempted by federal laws, thus complicating compliance efforts.
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Efforts to ensure that our and our partners
’
business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. With the approval of NUZYRA and SEYSARA, we have become subject to an expanded number of these laws and will need to expend resources to develop and implement policies and processes to promote ongoing compliance.
Many of these laws and their implementing regulations contain ambiguous requirements or require administrative guidance for implementation. Given the lack of clarity in laws and their implementation, our activities could be subject to challenge. It is possible that governmental authorities will conclude that our or our partners’ business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws. If our or our partners’ operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we or our partners may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could significantly harm our business.
Pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services 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 Drug Rebate Program to reduce liability for Medicaid rebates.
Outside of the United States, foreign laws may also regulate our activities, or those of our collaboration partners.
Europe has enacted a new data privacy regulation, the General Data Protection Regulation, with hefty enforcement penalties, a violation of which could subject us to significant fines.
In May 2018, a new privacy regime, the General Data Protection Regulation, or GDPR, took effect and is binding across all member states of the European Economic Area, or EEA. The GDPR increases our obligations with respect to clinical trials and other activities conducted in the EEA by expanding the definition of personal data to include coded data, and requiring changes to informed consent practices and more detailed notices. In addition, the GDPR increases the scrutiny that individuals or entities should apply to transfers of personal data from the EEA to countries that are considered to lack an adequate level of data protection, such as the United States. The GDPR imposes substantial fines for breaches of data protection requirements, which can be up to four percent of global turnover or 20 million Euros, whichever is greater, and it also confers a private right of action on data subjects for breaches of data protection requirements. Compliance with these directives will be a rigorous and time-intensive process that may increase our cost of doing business, and the failure to comply with these laws could subject us to significant fines.
Risks Related to Our Business
We are highly dependent on the commercial success of NUZYRA in the United States and, to a lesser extent, SEYSARA.
Our success is currently dependent on the successful commercialization of NUZYRA in the United States, which is also being developed by Zai in the Zai territory, and, to a lesser extent, SEYSARA, which Almirall has the rights to commercialize in the United States. We are not currently developing, and have no such plans to develop, any other product candidates, other than omadacycline for the treatment of UTIs, plague, anthrax, and other relevant clinical investigations. We may need additional financing or grants to fund development of any current or future product candidates.
The majority of our time, resources and effort are focused on the commercialization of NUZYRA and our ability to generate product revenues will depend heavily on the successful commercialization of NUZYRA. We have never, as an organization, commercialized a product, and there is no guarantee that we will be able to do so successfully with NUZYRA for its approved indications. Our ability to successfully commercialize NUZYRA will depend on, among other things, our ability to:
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maintain commercial manufacturing arrangements with third-party manufacturers;
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produce, through a validated process, sufficient quantities and inventory of NUZYRA to meet demand;
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build and maintain internal sales, distribution and marketing capabilities sufficient to generate commercial sales of NUZYRA;
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secure widespread acceptance of our product from physicians, healthcare payors, patients and the medical community;
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properly price and obtain coverage and adequate reimbursement of NUZYRA by governmental authorities, private health insurers, managed care organizations
and other third-party payors;
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maintain compliance with ongoing FDA labeling, packaging, storage, advertising, promotion, recordkeeping, safety and other post-market requirements;
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manage our growth and spending as costs and expenses increase due to commercialization; and
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establish and maintain collaborations with third parties for the commercialization of NUZYRA in countries outside of the United States, such as our existing collaboration with Zai to develop, manufacture and commercialize omadacycline in the Zai territory, and such collaborators’ ability to obtain regulatory and reimbursement approvals in such countries.
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There are no guarantees that we will be successful in completing these tasks. In addition, we have begun, and will need to continue investing substantial financial and management resources to build out our commercial infrastructure and to recruit and train sufficient additional qualified marketing, sales and other personnel in support of our sales of NUZYRA.
Sales of NUZYRA and SEYSARA may be slow or limited for a variety of reasons including competing therapies or safety issues. If NUZYRA and SEYSARA are not successful in gaining broad commercial acceptance, our business would be harmed.
Any sales of NUZYRA and SEYSARA will be dependent on several factors including our and our partners’ ability to educate and increase physician awareness of the benefits, safety and cost-effectiveness of NUZYRA and SEYSARA relative to competing therapies. The degree of market acceptance of NUZYRA and SEYSARA among physicians, patients, healthcare payors and the medical community will depend on a number of factors, including:
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acceptable evidence of safety and efficacy;
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relative convenience and ease of administration;
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prevalence and severity of any adverse side effects;
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availability of alternative treatments;
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pricing, cost effectiveness and value propositions;
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effectiveness of our sales and marketing capability and strategies;
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ability to obtain sufficient third-party coverage and reimbursement;
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the clinical indications for which NUZYRA and SEYSARA are approved, as well as changes in the standard of care for their targeted indications;
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the continuing effectiveness of manufacturing and supply chain;
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warnings and limitations contained in the approved labeling for NUZYRA;
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warnings and limitations contained in the approved labeling for SEYSARA, including that efficacy of SEYSARA beyond 12 weeks and safety beyond 12 months have not been established
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safety concerns with similar products marketed by others;
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the prevalence and severity of any side effects as a result of treatment with NUZYRA and SEYSARA;
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our ability to comply with FDA post-marketing requirements associated with the FDA approval of NUZYRA, including conducting and completing post-marketing studies; and
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the actual market-size for NUZYRA and SEYSARA, which may be larger or smaller than expected.
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In addition, NUZYRA and SEYSARA will be subject to cont
inual review by the FDA,
there can be no assurance
that newly discovered or developed safety issues will not arise. With the use of any newly marketed drug by a wider patient population, serious adverse events may occur from time to time that initially do
not appear to relate to the drug itself. For example, any safety issues could cause us to suspend or cease marketing NUZYRA, cause us to modify how we market NUZYRA, and may subject us to substantial liabilities and adversely affect our revenues and financ
ial condition. In the event of a withdrawal of NUZYRA from the market, our revenues would decline significantly
,
and our business would be seriously harmed and could fail. We and our partners additionally may experience significant fluctuations in sales of
NUZYRA and SEYSARA from period to period and, ultimately, we may never generate sufficient revenues from NUZYRA and SEYSARA to reach or maintain profitability or sustain our anticipated operations.
We face significant competition and if our competitors develop and market products that are more effective, safer or less expensive than our products, our commercial opportunities will be negatively impacted.
The life sciences industry is highly competitive and subject to rapid and significant technological change, including but not limited to with respect to innovations related to diagnostic devices. NUZYRA and SEYSARA will compete with other drugs and therapies that currently exist or are being developed. Products that we may develop in the future are also likely to face competition from other drugs and therapies, some of which we may not currently be aware. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, universities and other research institutions. Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do. 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, development and marketing capabilities than we do and may also have products that have been approved or are in late stages of development, 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 to in-license novel compounds or develop technologies, that could make the product candidates that we develop obsolete or less competitive. As a result of all of these factors, our competitors may succeed in obtaining patent protection and/or regulatory approvals or discovering, developing and commercializing competing technologies before we do so for any of our product candidates.
The GAIN Act is intended to provide incentives for the development of new Qualified Infectious Disease Products. These incentives may result in more competition in the market for new antibiotics and may cause pharmaceutical and biotechnology companies with more resources than we have to shift their efforts toward the development of products that could be competitive with our product candidates.
NUZYRA will compete with other antibiotics in the serious bacterial skin infection market. These include, but are not limited to, vancomycin, marketed as a generic by Abbott Laboratories and others; linezolid, marketed as Zyvox by Pfizer Inc. and available as a generic; daptomycin, marketed as Cubicin by Merck Pharmaceuticals, Inc. and available as a generic; dalbavancin, approved in May 2014 and marketed as Dalvance by Allergan;
tedizolid, marketed as Sivextro by Merck Pharmaceuticals, Inc.; Baxdela approved in October 2017 and marketed by Melinta Therapuetics, Inc.; oritavancin, approved in August 2014 and marketed as Orbactiv by Melinta Therapeutics, Inc.; quinupristin/dalfopristin, marketed as Synercid by Pfizer, Inc.; tigecycline, marketed as Tygacil by Pfizer Inc. and available as a generic; telavancin, marketed as Vibativ by Theravance, Inc.; ceftaroline, marketed as Teflaro by Allergan; and the following generics: trimethoprim/sulfamethoxazole, clindamycin minocycline, doxycycline, and tetracycline. We are also aware of various drugs that are or may eventually be under development for the treatment of serious skin infections, and these include but are not limited to: Iclaprim by Motif Bio and Lefamulin by Nabriva.
NUZYRA will also compete with other antibiotics in the community-acquired pneumonia market. These include, but are not limited to, azithromycin, marketed as Zithromax and Z-PAK by Pfizer Inc. and available as a generic; clarithromycin, marketed as Biaxin by Abbott Laboratories and available as a generic; moxifloxacin, marketed as Avelox by Bayer AG and available as a generic; levofloxacin, marketed as Levaquin by Johnson & Johnson and available as a generic; tigecycline, marketed as Tygacil by Pfizer Inc. and available as a generic; linezolid, marketed as Zyvox by Pfizer Inc. and available as a generic; ceftriaxone, marketed as Rocephin by F. Hoffman-La Roche Ltd and available as a generic; and ceftaroline, marketed as Teflaro by Allergan. We are also aware of various drugs that are or may eventually be under development for the treatment of CABP, including, but not limited to, delafloxacin and radezolid, under development by Melinta Therapeutics; GSK2140944, under development by GSK; and lefamulin, under dev
elopment by Nabriva Therapeutics.
A number of competitors also exist in the UTI indication. If omadacycline is approved by the FDA for the UTI indication, generic potential competitors include, but are not limited to, levofloxacin, ciprofloxacin, trimethoprim/sulfamethoxazole, ceftriaxone and amoxicillin/clavulanic acid. Several branded and generic injectable-only antibiotics are also used in hospitals, including imipenem/cilastatin, piperacillin/tazobactam, and gentamicin. We are also aware of several other new oral antibiotics under development for the treatment of UTI infections.
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Finally, SEYSARA will face competition in the acne markets where generic tetracyclines such as doxycycline and minocycline are available in every market around the world. Brande
d generic versions of tetracycline derivatives are sold by several companies.
Many of our potential competitors have substantially greater financial, technical and human resources than we do, as well as greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. Our competitors
’
drugs may be more effective, or more effectively marketed and sold, than NUZYRA, SEYSARA or any other product candidate we may commercialize and may render NUZYRA, SEYSARA or our other product candidates obsolete or non-competitive before we can recover the expenses of our development and commercialization. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. Finally, the development of new treatment methods for the diseases we are targeting could render NUZYRA, SEYSARA or our other product candidates non-competitive or obsolete.
In addition, many universities and private and public research institutes may become active in our target indications. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.
We believe that our ability to successfully compete will depend on, among other things:
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the efficacy, safety and reliability of NUZYRA, SEYSARA and our and our partners
’ other
product candidates, including as relative to marketed products and product candidates in development by third parties;
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our and our partners
’
ability to reliably manufacture any of our formulations;
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the speed at which we and our partners develop future product candidates;
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our and our partners
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ability to commercialize and market, or find partners to help or exclusively commercialize and market, NUZYRA, SEYSARA or any future product candidates that receive regulatory approval;
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our and our partners
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ability to design and successfully execute appropriate clinical trials, as well as the results of such clinical trials, including our two Phase 2 registration clinical trials for omadacycline-one in cystitis, a common uncomplicated UTI, and one in acute pyelonephritis, a common complicated UTI;
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our and our partners’ ability to recruit and enroll patients for our and our partners’ clinical trials;
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our and our partners
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ability to maintain a productive relationship with regulatory authorities;
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the timing and scope of regulatory approvals;
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the effectiveness of our, our current partners
’
or any future partners
’
marketing and sales capabilities;
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the price of our products, including in comparison to branded or generic competitors;
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coverage and adequate levels of reimbursement under private and governmental health insurance plans, including Medicare;
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our and our partners
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ability to protect and maintain intellectual property rights related to NUZYRA, SEYSARA and any of our or their other product candidates;
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our and our partners’ ability to manage our growth and spending as costs and expenses increase due to commercialization of NUZYRA and SEYSARA;
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our and our partners’ ability to maintain compliance with ongoing FDA labeling, packaging, storage, advertising, promotion, recordkeeping, safety and other post-market requirements, including required post-marketing studies;
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our and our partners
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ability to manufacture and sell commercial quantities at a reasonable cost of NUZYRA and SEYSARA; and
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acceptance of NUZYRA and SEYSARA by physicians and other healthcare providers.
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In addition, the biopharmaceutical industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete, less competitive or not economical.
Furthermore, price competition may inhibit the acceptance of our products, physicians may be reluctant to switch from existing products to our products, physicians may switch to other newly approved drug products, or physicians may choose to reserve our products for use in limited circumstances.
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We rely and will continue to rely on outsourcing arrangements for manufacturing of NUZYRA and any future product candidates. Reliance on third- party manufacturers could impair the commercialization of NUZYRA or delay approval of any future product candidates.
We do not currently own or operate manufacturing facilities for the production of NUZYRA or any other product candidate, nor do we currently intend to manufacture NUZYRA or any other pharmaceutical products that we may plan to sell in the future. We currently depend on third-party contract manufacturers for the supply of the active pharmaceutical ingredients for NUZYRA. We have entered into certain long-term manufacturing and supply agreements. These include (i) a manufacturing and services agreement with CIPAN for the supply of starting materials for our supply of omadacycline and crude omadacycline, (ii) an outsourcing agreement with Carbogen for the supply of active pharmaceutical ingredient for our omadacycline products, (iii) a manufacturing and services agreement with Almac for the supply of omadacycline oral solid dosage tablets, (iv) a manufacturing and services agreement with Patheon under which Patheon will manufacture, package and supply to us, omadacycline in injectable form and (v) a third party logistics provider agreement with ICS (Amerisource Bergan co.) under which ICS will perform distribution and logistics services. We are currently in discussions with other third-party manufacturers and may enter into additional long-term supply agreements with them. We may not be able to reach agreement with some of these contract manufacturers, or to identify and reach arrangement on satisfactory terms with other contract manufacturers, to manufacture NUZYRA or any future product candidates. Additionally, we anticipate that the facilities used by any contract manufacturer to manufacture NUZYRA or any future product candidates will be the subject of inspections by regulatory agencies before the FDA and other regulatory authorities that approve an NDA or marketing authorization for the product candidate manufactured at that facility. We will depend on these third-party manufacturing partners for compliance with the FDA
’
s manufacturing requirements for finished products. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA and other regulatory authorities
’
cGMP requirements, our future product candidates may not be approved or, in the case of NUZYRA, may be subject to delays in release and/or product recalls. While third-party manufacturers of NUZYRA have previously passed FDA and other regulatory agency inspections, we cannot provide assurance that they will pass such inspections in the future.
Furthermore, any interruption of the development or operation of the manufacturing facilities due to, among other reasons, events such as order delays for equipment or materials, equipment malfunction, quality control and quality assurance issues, regulatory delays and possible negative effects of such delays on supply chains and expected timelines for product availability, production yield issues, shortages of qualified personnel, discontinuation of a facility or business or failure or damage to a facility by natural disasters, could result in the cancellation of shipments, loss of product in the manufacturing process or a shortfall in available NUZYRA, other product candidates or materials.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products and product candidates ourselves, including:
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the possibility of a breach of the manufacturing agreements by the third parties because of factors beyond our control;
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the possibility of termination or nonrenewal of the agreements by the third parties before we are able to arrange for a qualified replacement third-party manufacturer;
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the possibility that third parties are unable to manufacture NUZYRA consistently in commercial quantities, at acceptable costs on expected timelines;
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the possibility that we may not be able to maintain or secure manufacturers or manufacturing capacity in a timely manner and on satisfactory terms in order to meet our manufacturing needs; and
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the possibility that the third parties may not be able to respond adequately to unexpected changes in demand forecasts that may result in either lost revenue or excessive inventory with decreasing shelf-life.
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Any of these factors could cause the delay of commercialization of NUZYRA, delay the development and approval of any future product candidates, or cause us to incur higher costs or prevent us from commercializing NUZYRA and any future product candidates successfully. Furthermore, if contract manufacturers fail to continuously meet FDA compliance standards or 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 one or more years to establish an alternative source of supply and to have any such new source approved by the FDA or any other relevant regulatory authorities.
Our current and anticipated future dependence upon others for the manufacture of NUZYRA and any future product candidates may adversely affect our future profit margins and our ability to commercialize on a timely and competitive basis NUZYRA or any future product candidates that receive marketing approval.
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If the FDA or other applicable regulatory authorities approve generic products that compete with NUZYRA, SEYSARA o
r any of our or our partners’ product candidates, or if existing generic antibiotics are viewed as being equally effective to NUZYRA, SEYSARA or any of our or our partners’ product candidates, the sales of NUZYRA, SEYSARA or, if approved, such product cand
idates would be adversely affected.
Once an NDA or marketing authorization application outside of the United States is approved, the product covered thereby becomes a
“
listed drug
”
that can, in turn, be cited by potential competitors in support of approval of an Abbreviated New Drug Application, or ANDA, in the United States. Agency regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non- infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes in the United States and in nearly every pharmaceutical market around the world. These manufacturers might only be required to conduct a relatively inexpensive study to show that their product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use, or labeling, as our product candidate and that the generic product is bioequivalent to ours, meaning it is absorbed in the body at the same rate and to the same extent as our product candidate. These generic equivalents, which must meet the same quality standards as branded pharmaceuticals, would be significantly less costly than ours to bring to market, and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product is typically lost to the generic product. Accordingly, competition from generic equivalents to ours or any of our partners
’
future products, if any, would materially adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in our or any of our partners
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products, including NUZYRA and SEYSARA. For example, vancomycin has been available in generic form for many years, and Zyvox (linezolid) is now available in generic form. We cannot yet ascertain what impact these generic products and any future approved generic products will have on any sales of NUZYRA, SEYSARA or, if approved, any of our or our partners’ product candidates.
The success of our business may be dependent on the actions of our collaborative partners.
An element of our business and funding strategy is to enter into collaborative arrangements with established pharmaceutical and biotechnology companies who will finance or otherwise assist in the development, manufacture and marketing of products incorporating our technology, and who also provide us with funding in the form of milestone payments for progress in clinical development or regulatory approval. For example, we exclusively licensed rights to sarecycline for the treatment of acne in the United States to Allergan, who assigned such rights to Almirall, and Almirall is responsible for all clinical development, registration and commercialization in the United States of sarecycline for the treatment of acne. In addition, Almirall has an exclusive license to develop and commercialize sarecycline for the treatment of rosacea in the United States, which converted to a non-exclusive license in December 2014 after Allergan did not exercise its development option with respect to rosacea. There are currently no clinical trials in rosacea underway. In April 2017, Paratek Bermuda Ltd., a wholly-owned subsidiary of Paratek Pharmaceuticals, Inc., entered into the Zai Collaboration Agreement, pursuant to which we granted Zai an exclusive license to develop, manufacture and commercialize omadacycline in the Zai territory for all human therapeutic and preventative uses other than biodefense. Zai is responsible for the development, manufacturing and commercialization of the licensed product in the Zai territory, at its sole cost with certain assistance from Paratek Bermuda Ltd.
Accordingly, our prospects will depend in part upon our ability to attract and retain collaborative partners and to develop technologies and products that achieve the criteria for milestone payments. When we collaborate with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party in the respective territory. In addition, our collaborative partners may have the right to abandon research or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms. We may not be successful in establishing or maintaining collaborative arrangements on acceptable terms or at all, collaborative partners may terminate funding before completion of projects, our product candidates may not achieve the criteria for milestone payments, our collaborative arrangements may not result in successful product commercialization, and we may not derive any revenue from such arrangements. For example, we previously entered into a license and collaboration agreement with Novartis for the development of omadacycline, which was terminated. To the extent that we are not able to develop and maintain collaborative arrangements, we would need substantial additional capital to undertake research, development and commercialization activities on our own, we may be forced to limit the number of our product candidates we can commercially develop or the territories in which we commercialize them, and we might fail to commercialize products or programs for which a suitable collaborator cannot be found.
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Reliance on collaborative relationships poses a number of risks, including the following:
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our collaborators may not perform their obligations as expected or in compliance with applicable laws;
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the prioritization, amount and timing of resources dedicated by our collaborators to their respective collaborations with us is not under our control;
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some product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or products;
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our collaborators may elect not to proceed with the development of product candidates that we believe to be promising;
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disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of product candidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
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some of our collaborators might develop independently, or with others, products that could compete with our products;
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a delay in the development timeline for omadacycline in the Zai territory would result in a potential loss of milestone payments and future royalties (if any) from the partnership under the Zai Collaboration Agreement; and
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if the rights to sarecycline in the United States are returned to us by Almirall, or the rights to omadacycline in the Zai territory returned to us by Zai, we will need to establish a new development and commercialization partnership to further sarecycline in the United States or omadacycline in the Zai territory. There can be no assurance that we would be able to find such a partner.
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If we are not able to establish and sustain additional partnerships, we may have to alter our commercialization and development plans, which could harm our business.
We anticipate that we will require additional funding to support commercialization of NUZYRA and to continue the development of any other product candidates. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates, as we have done with Allergan for sarecycline in the United States (who assigned its rights to Almirall) and Zai for omadacycline in the Zai territory.
We face significant competition in seeking appropriate collaborators. Whether or not we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator
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s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator
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s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside of the United States, the potential market for the product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the patent position protecting the product candidate, the potential of competing products, the need to seek licenses or sub-licenses to third-party intellectual property and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies and whether collaboration on an alternative product could be more attractive than a collaboration with us. We may also be restricted under future license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate collaborations on a timely basis, on acceptable terms or at all. If we are unable to do so, it may delay completion of development and potential commercialization of our products. If we elect to increase our expenditures to fund development, registration or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.
Further, even if we are able to enter into collaborations, we must be able to sustain a mutually beneficial working relationship with our collaborators in order to achieve the intended benefits of those collaborations. In the past, certain of our collaborators, including Novartis, have terminated their partnering relationships with us due to delays and uncertainties in connection with the FDA regulatory pathway for approval of omadacycline for the ABSSSI and CABP indications. This past history may affect our ability to attract and enter into collaboration arrangements with future partners or collaborators.
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We are currently building our sales and distribution infrastructure. If we are unable to develop our sales, marketing and distribution capability on our own or
through collaborations with marketing partners, we will not be successful in commercializing NUZYRA or any other product candidates.
While we have entered into an arrangement with a third party to provide a contract field sales force, we currently are building the sales force and distribution capabilities within our organization. We are in the process of establishing a sales and marketing organization with technical expertise and supporting distribution capabilities to successfully commercialize NUZYRA, or to outsource this function to a third party. Both of these options can be expensive and time consuming. In addition, we may not be able to hire a sales force in the United States that is large enough or has adequate expertise in the medical markets that we intend to target. Any failure or delay in the development of our sales, marketing and distribution capabilities would adversely impact the commercialization of NUZYRA.
With respect to our existing and future product candidates, we may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or as an alternative to our own sales force and distribution systems. To the extent that we enter into co-promotion or other licensing arrangements, our product revenue and profitability may be lower than if we directly marketed or sold any approved products. In addition, any revenue we receive will depend in whole or in part upon the efforts of these third parties, which may not be successful and are generally not within our control. If we are unable to enter into these arrangements on acceptable terms or at all, we may not be able to successfully commercialize any approved products. If we are not successful in commercializing any approved products, either on our own or through collaborations with one or more third parties, our future product revenue will suffer, and we may incur significant additional losses.
The Company has limited experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties.
We have hired a commercial team and we are in process of establishing the organizational infrastructure we believe we need for a successful commercial launch of NUZYRA. We will need to commit significant time and financial and managerial resources to maintain and further develop our marketing and sales force to ensure they have the technical expertise required to address any challenges we may face with the commercialization of NUZYRA.
Factors that may inhibit our efforts to maintain and develop our commercialization capabilities include:
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an inability to retain an adequate number of effective commercial personnel in the medical markets we intend to target;
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an inability to train sales personnel, who may have limited experience with our company or NUZYRA, to deliver a consistent message regarding NUZYRA and be effective in convincing physicians to prescribe NUZYRA;
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a lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines;
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an inability to equip sales personnel with effective materials, including medical and sales literature to help them educate physicians and our healthcare providers regarding NUZYRA and its proper administration; and
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unforeseen costs and expenses associated with maintaining and further developing an independent sales and marketing organization.
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If we are not successful in establishing and maintaining an effective sales and marketing infrastructure, we will have difficulty commercializing NUZYRA and our future product revenue will suffer, which would adversely affect our business and financial condition.
If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing NUZYRA.
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If we are unable to establish and main
tain our agreements with third parties to distribute NUZYRA to patients, our results of operations and business could be adversely affected.
We will rely on third parties to commercially distribute NUZYRA to patients. We have contracted with a third-party logistics company to warehouse NUZYRA and to process and ship customer orders, and are negotiating contracts with specialty pharmacies and specialty distributors to sell and distribute NUZYRA. The specialty pharmacies sell NUZYRA directly to patients and provide patient education and ongoing management. The specialty distributors sell NUZYRA to hospitals and other large buying institutions. We have also contracted with a third-party patient services hub to help us with some or all of the following: benefits investigation and reimbursement adjudication support, patient assistance programs and ongoing compliance support. This distribution network will require significant coordination with our sales and marketing and finance organizations. In addition, failure to coordinate financial systems could negatively impact our ability to accurately report product revenue from NUZYRA. If we are unable to effectively manage the distribution process, the commercial launch and sales of NUZYRA, as well as any future products we may commercialize, sales could be delayed or severely compromised and our results of operations may be harmed.
In addition, the use of specialty pharmacies, specialty distributors and a third party patient services hub involves certain risks, including, but not limited to, risks that these organizations will:
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not provide us with accurate or timely information regarding their inventories, the number of patients who are using NUZYRA or serious adverse reactions, events and/or product complaints regarding NUZYRA;
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not effectively sell or support NUZYRA, or communicate publicly concerning NUZYRA in a manner that is contrary to FDA rules and regulations;
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reduce or discontinue their efforts to sell or support NUZYRA;
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not devote the resources necessary to sell NUZYRA in the volumes and within the time frame we expect;
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be unable to satisfy financial obligations to us or others; or
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Any such events may result in decreased product sales and lower product revenue, which would harm our results of operations and business. Additionally, the provision of patient support services, although fairly typical in the pharmaceutical industry, can be subject to challenge under fraud and abuse or FDA laws if not structured appropriately.
Independent clinical investigators and CROs that we engage to conduct our clinical trials may not devote sufficient time or attention to our and our partners’ clinical trials or be able to repeat their past success.
We expect to depend on independent clinical investigators and CROs to participate in and conduct our clinical trials, including our ongoing Phase 2 studies in UTI. CROs may also assist us and our partners in the collection and analysis of data. There is a limited number of third-party service providers that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult, time consuming and cause delays in our or our partners
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development programs. These investigators and CROs will not be our employees, and we will not be able to control, other than by contract, the amount of resources, including time, that they devote to our product candidates and clinical trials. If independent investigators fail to devote sufficient resources to the development of our product candidates, or if their performance is substandard, it may delay or compromise the prospects for approval and commercialization of any product candidates that we and our partners develop. 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. Further, the FDA requires that we and our partners comply with standards, commonly referred to as current Good Clinical Practices, for conducting, recording and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, safety, integrity and confidentiality of clinical trial subjects are protected. Failure of clinical investigators or CROs to meet their obligations to us or comply with current Good Clinical Practices could adversely affect the clinical development of our product candidates and harm our business.
If NUZYRA or SEYSARA do not achieve broad market acceptance among physicians, patients, the medical community and third-party payors, our revenue generated from their sales will be limited.
The commercial success of NUZYRA and SEYSARA will depend upon their level of market acceptance among physicians, patients and the medical community. The degree of market acceptance of NUZYRA and SEYSARA will depend on a number of factors, including:
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limitations or warnings contained in the product
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s FDA or foreign regulatory approved labeling;
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changes in the standard of care for the targeted indications for any of our products;
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limitations in the approved clinical indications for our products;
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demonstrated clinical safety and efficacy compared to
other products;
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lack of significant adverse side effects;
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sales, marketing, reimbursement and distribution support;
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availability of coverage and adequate reimbursement from governmental or private third-party payors, such as Medicare or managed care plans;
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the extent to which government or third-party payors implement utilization management techniques, such as unreasonably high copayment formulary tiers, prior authorization or quantity limits for our product(s), or even refuse to provide reimbursement for the products;
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timing of market introduction and perceived effectiveness of competitive products;
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the degree of cost-effectiveness and value of our products;
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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 the product is approved for inclusion on formularies of hospitals, and third-party payors, including managed care organizations;
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whether the product is designated under physician treatment guidelines as a therapy for particular infections;
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whether the product is designated under national treatment or formulary guidelines;
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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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Although we believe our clinical studies demonstrate that NUZYRA and SEYSARA represent clinically meaningful and efficacious options for patients and physicians, it is possible that as we receive data from additional clinical trials or in a post-market setting from physician and patient experiences with the commercial products that do not continue to support such interpretations. It is also possible that the FDA, physicians and third-party payors will not agree with our interpretation of our existing and future clinical trial data. If we are unable to demonstrate the value of NUZYRA and SEYSARA based on our data, our opportunity for these products to maintain premium pricing and be commercialized successfully would be adversely affected. If NUZYRA or SEYSARA do not achieve an adequate level of acceptance by physicians, patients and the medical community, we and our partners may not generate sufficient revenue 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 NUZYRA, SEYSARA or our product candidates may require significant resources and may never be successful.
Even though NUZYRA and SEYSARA have been approved for marketing in the United States, we or our partners may never obtain approval of or commercialize NUZYRA or SEYSARA outside of the United States, which would limit our ability to realize their full market potential.
In October 2018, the FDA approved NUZYRA in the United States for the treatment of adults with CABP and ABSSSI that are proven or strongly suspected to be caused by susceptible bacteria. We have global commercial rights to omadacycline, except that we have entered into a collaboration with Zai to develop, manufacture and commercialize omadacycline in the Zai territory. In October 2018, the FDA also approved SEYSARA for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients nine years of age and older. In the United States, Almirall has the rights to commercialize SEYSARA, whereas we retain all ex-U.S. rights to sarecycline. In the future, we, or our partners, may seek to commercialize omadacycline or sarecycline in countries outside of the United States.
In order to market products outside of the United States, we and our partners must comply with numerous and varying regulatory requirements of other jurisdictions regarding safety and efficacy. Approval procedures vary among jurisdictions and can involve product testing and administrative review periods different from, and greater than, those in the United States. For example, we are seeking approval of omadacycline in Europe for the treatment of CABP and ABSSSI, and on October 4, 2018, we announced the acceptance of our submission to European Medicines Agency of the Marketing Authorization Application (MAA) for omadacycline.
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inical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among cou
ntries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and may require additional preclinical stu
dies or clinical trials. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition, our failure to obtain regulatory approval in any country may delay or have negative effects o
n the process for regulatory approval in other countries.
Regulatory approval in one jurisdiction does not ensure regulatory approval in another, but failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory process in others. Failure to obtain regulatory approvals in other jurisdictions or any delay or setback in obtaining such approvals could adversely affect our business and financial condition.
Bacteria might develop resistance to any of our antibiotic product candidates, which would decrease the efficacy and commercial viability of those product candidates.
Antibiotic resistance is primarily caused by the genetic mutation of bacteria resulting from suboptimal exposure to antibiotics where the drug does not eradicate all of the bacteria. While antibiotics have been developed to treat many of the most common infections, the extent and duration of their use worldwide has resulted in new mutated strains of bacteria resistant to current treatments. NUZYRA has been developed to treat patients infected with drug-resistant bacteria. If physicians, rightly or wrongly, associate the resistance issues of older generations of tetracyclines with NUZYRA, physicians might not prescribe NUZYRA for treating a broad range of infections. In addition, bacteria might develop resistance to NUZYRA if such bacteria are improperly dosed or treated repeatedly with NUZYRA over multiple years, causing the efficacy of NUZYRA to decline, which would negatively affect our potential to generate revenue from NUZYRA.
Our business and operations would suffer in the event of computer system failures.
Despite the implementation of security measures, our internal computer systems, and those of our CROs, our partners and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. In addition, our systems safeguard important confidential personal data regarding our subjects. If a computer failure were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the commercialization of NUZYRA and development other product candidates could be delayed.
If any product liability lawsuits are successfully brought against us or any of our collaborative partners, we may incur substantial liabilities and may be required to limit commercialization of our products, including NUZYRA and SEYSARA.
We face an inherent risk of product liability lawsuits related to the testing of our products in seriously ill patients and will face an even greater risk from any sales of NUZYRA and SEYSARA. Product liability claims may be brought against us or our partners by participants enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling any of our products. If we cannot successfully defend ourselves against any such claims, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for NUZYRA or SEYSARA;
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injury to our reputation and significant negative media attention;
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withdrawal of clinical trial participants;
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termination of clinical trial sites or entire clinical trial programs;
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significant litigation costs;
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substantial monetary awards to or costly settlements with patients or other claimants;
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product recalls or a change in the indications for which they may be used;
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diversion of management and scientific resources from our business operations; and
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the inability of us or our partners to successfully commercialize our products.
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With the approval of NUZYRA and SEYSARA for commercial sale, we are highly dependent upon consumer perceptions of u
s and the safety and quality of our products. We could be adversely affected if we are subject to negative publicity. We could also be adversely affected if any of our products or any similar products distributed by other companies prove to be, or are asse
rted to be, harmful to patients. Also, because of our dependence upon consumer perceptions, any adverse publicity associated with illness or other adverse effects resulting from patients
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use or misuse of our products or any similar products distributed by
other companies could have a material adverse impact on our results of operations.
We currently hold $10.0 million in product liability insurance coverage in the aggregate annually, with a per incident limit of $10.0 million, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is becoming increasingly expensive. As a result, we may be unable to maintain or obtain sufficient insurance at a reasonable cost to protect us against losses that could have a material adverse effect on its business. These liabilities could prevent or interfere with our product development and commercialization efforts. 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, financial condition and results of operation.
If we fail to attract and retain key management and scientific personnel, we may be unable to successfully commercialize NUZYRA or develop our other product candidates.
Our industry has experienced a high rate of turnover of management personnel in recent years. We are to a certain extent dependent on the members of our senior management team for our business success. The employment agreements with our senior management team can be terminated by us or them at any time, with notice. The departure of any of our executive officers could result in a significant loss in the knowledge and experience that we, as an organization, possesses and could cause significant delays, or outright failure, in the execution of our strategies, the successful commercialization of NUZYRA, and the development of our other product candidates.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, development and clinical personnel. We may not be able to attract or retain such qualified personnel due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly our development objectives and timelines, the success of our commercialization efforts, our ability to raise additional capital and our ability to implement our business strategy.
We depend on various consultants and advisors for the success and continuation of our development efforts.
We work extensively with various consultants and advisors, who provide advice and/or services in various business and development functions, including clinical development, operations and strategy, regulatory matters, legal and finance. The potential success of our drug development programs depends, in part, on continued successful collaborations with certain of these consultants and advisors. Our consultants and advisors are not our employees and may have commitments and obligations to other entities that may limit their availability to us. Typically, these advisors 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. We do not know if we will be able to maintain such relationships or that such consultants and advisors will not enter into other arrangements with competitors, any of which could have a detrimental impact on our development objectives and our business.
We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.
As of September 30, 2018, we had 96 full-time employees. With the FDA approval of NUZYRA, we expect to expand our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of their attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations that may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of existing and additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to successfully commercialize NUZYRA, develop our other product candidates and compete effectively with others in our industry will depend, in part, on our ability to effectively manage any future growth.
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Our and our partners’ business may become subject to economic, political, regulatory and other risks associated with international
operations.
Our business is subject to risks associated with conducting business internationally, in part due to a number of our suppliers and collaborative and clinical trial relationships being located outside of the United States. Accordingly, our future results could be harmed by a variety of factors, including:
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economic weakness, including inflation or political instability, in particular foreign economies and markets;
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differing regulatory requirements for drug approvals in foreign countries;
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differing regulatory requirements for drug product pricing and reimbursement;
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potentially reduced protection for intellectual property rights;
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difficulties in compliance with non-U.S. laws and regulations;
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changes in non-U.S. regulations and customs, tariffs and trade barriers;
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changes in non-U.S. currency exchange rates and currency controls;
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changes in a specific country
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trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non-U.S. governments;
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negative consequences from changes in tax laws;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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difficulties associated with staffing and managing foreign operations, including differing labor relations;
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, typhoons, floods and fires.
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These risks may materially adversely affect our ability to attain or sustain profitable operations.
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research and development involves the use of potentially hazardous materials and chemicals. Our operations may have produced hazardous waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards mandated by local, state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We are also subject to numerous environmental, health and workplace safety laws and regulations and fire and building codes, including those governing laboratory procedures, exposure to blood-borne pathogens, use and storage of flammable agents and the handling of biohazardous materials. Although we have always maintained workers
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compensation insurance as prescribed by the Commonwealths of Massachusetts and Pennsylvania to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.
Our employees, contractors, partners, principal investigators, CROs, consultants and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk that our employees, contractors, partners, principal investigators, CROs, consultants and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA, federal and state healthcare fraud and abuse laws and regulations, laws that require the reporting of financial information or data timely, completely or accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct,
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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, cust
omer incentive programs and other business arrangements. Third-party 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. It
is not always possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other
actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us resulting from this misconduct, and we are not successful in defending ourselves or asserting our rights, those actions coul
d have a significant impact on our business, including the imposition of significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs,
such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could significantly harm our business.
We enter into various contracts in the normal course of our business in which we indemnify the other party to the contract. In the event we have to perform under these indemnification provisions, it could have a material adverse effect on our business, financial condition and results of operations.
In the normal course of business, we periodically enter into academic, commercial, service, collaboration, licensing, consulting and other agreements that contain indemnification provisions. With respect to our academic and other research agreements, we typically indemnify the institution and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements for which we have secured licenses, and from claims arising from our or our sub licensees
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exercise of rights under the agreement. With respect to our commercial agreements, we indemnify our vendors from any third-party product liability claims that could result from the production, use or consumption of the product, as well as for alleged infringements of any patent or other intellectual property right by a third party. With respect to consultants, we indemnify them from claims arising from the good faith performance of their services.
Should our obligation under an indemnification provision exceed applicable insurance coverage or if we were denied insurance coverage, our business, financial condition and results of operations could be adversely affected. Similarly, if we are relying on a collaborator to indemnify us and the collaborator is denied insurance coverage or does not have assets available to indemnify us, our business, financial condition and results of operations could be adversely affected.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of former employers.
Certain of our former employees were previously employed at universities or other biotechnology or pharmaceutical companies, including competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we ourselves inadvertently or otherwise used or disclosed trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent us or a collaboration partner
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s ability to develop or commercialize certain potential products, which could severely harm the business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
Risks Related to Our Intellectual Property
If we are unable to obtain and enforce patent protection for products, our product candidates and related technology, our business could be materially harmed.
Issued patents may be challenged, invalidated or circumvented. In addition, court decisions may introduce uncertainty in the enforceability or scope of patents owned by pharmaceutical companies. The legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not allow us to protect our inventions with patents to the same extent as do the laws of the United States. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in scientific literature lag behind actual discoveries, or may not be the first to make the inventions claimed in issued patents or pending patent applications, or may not be the first to file for protection of the inventions set forth in our patents or patent applications. As a result, we may not be able to obtain or maintain protection for certain inventions. If such inventions or related inventions are successfully patented by others, we may be required to obtain licenses under third-party patents to market our product candidates, as described in greater detail below. Therefore, enforceability and scope of our patents in the United States and in foreign countries cannot be predicted with certainty, and, as a result, any patents that we own or license may not provide sufficient protection against competitors. We may not be able to obtain or maintain patent protection from our pending patent applications, from those we may file in the future, or from those we may license from third parties. Moreover, even if we are able to obtain patent protection, such patent protection may be of insufficient scope to achieve our business objectives, or may not survive legal or administrative challenges by competitors.
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Our strategy depends on our ability to identify and seek and obtain patent protection for our discoveries. This process is expensive and time consuming, and we may not be able to file and prosecute successfully all necessary or desirable patent app
lications at a reasonable cost or in a timely manner or in all jurisdictions where protection may be commercially advantageous. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we re
gard as proprietary. The issuance of a patent does not ensure that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable against third parties. In addition, the issuance of a patent does not give us the right to pra
ctice the patented invention. Third parties may have blocking patents that could prevent us from marketing our own patented product and practicing our own patented technology. Third parties may also seek to market generic versions of any approved products
by submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable and/or not infringed. Alternatively, third parties may seek approval to market their own products similar to or otherwise competitive with ou
r products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid and
/or unenforceable. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.
The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards that the U.S. Patent and Trademark Office, or USPTO, and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. The laws of some foreign countries do not protect proprietary information to the same extent as do the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these foreign countries. Outside of the United States, patent protection must be sought in individual jurisdictions, further adding to the cost and uncertainty of obtaining adequate patent protection outside of the United States. Accordingly, additional patents protecting our technology may not issue in the United States or in foreign jurisdictions, and any patents that do issue may not have claims of adequate scope to provide competitive advantage. Moreover, third parties may be able to successfully obtain claims and such claims may be broad. The allowance of broader claims may increase the incidence and cost of patent interference proceedings, opposition proceedings and/or reexamination proceedings, the risk of infringement litigation and the vulnerability of the claims to challenge. On the other hand, the allowance of narrower claims does not eliminate the potential for adversarial proceedings and may fail to provide a competitive advantage. Our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage. Moreover, even after they have issued, our patents and any patent for which we have licensed or may license rights may be challenged, narrowed, invalidated or circumvented. If our patents are invalidated or otherwise limited or expire prior to the commercialization of our product candidates, other companies may be better able to develop products that compete with our products which could adversely affect our competitive business position, business prospects and financial condition. The following are examples of litigation and other adversarial proceedings or disputes that we could become a party to involving our patents or patents licensed to us:
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we or our partners may initiate litigation or other proceedings against third parties to enforce our patent rights;
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third parties may initiate litigation or other proceedings seeking to invalidate patents owned by or licensed to us or to obtain a declaratory judgment that their product or technology does not infringe our patents or patents licensed to us;
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third parties may initiate opposition or reexamination proceedings challenging the validity or scope of our patent rights, requiring us or our partners to participate in such proceedings to defend the validity and scope of our patents;
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there may be a challenge or dispute regarding inventorship or ownership of patents currently identified as being owned by or licensed to us;
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the USPTO may initiate an interference between patents or patent applications owned by or licensed to us and those of our competitors, requiring us or our collaborators to participate in an interference proceeding to determine the priority of invention, which could jeopardize our patent rights; or
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third parties may submit ANDAs to the FDA seeking approval to market generic versions of our approved or future approved products prior to expiration of relevant patents owned by or licensed to us, requiring us to defend our patents, including by filing lawsuits alleging patent infringement.
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These lawsuits and proceedings would be costly and could adversely affect our results of operations and divert the attention of our managerial and scientific personnel. A court or administrative body may decide that our patents are invalid or not infringed by a third party
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s product or activity or that the scope of certain issued claims must be further limited. An adverse outcome in a litigation or proceeding involving our own patents could limit our ability to assert our patents against these or other competitors and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. An adverse outcome in a dispute involving inventorship or ownership of our patents could, for example, subject us to additional royalty obligations and expand the number of product candidates that are subject to the royalty and other obligations of our license agreement with Tufts.
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The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or
keep our competitive advantage. For example:
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others may be able to develop a platform that is similar to, or better than, ours in a way that is not covered by the claims of our patents;
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others may be able to make compounds that are similar to our products 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 pending patent applications;
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we might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies;
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we may be unable to effectively protect our trade secrets;
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any patents that we obtain may not provide us with any competitive advantages or may ultimately be found invalid or unenforceable;
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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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Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.
Our and our partners
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success will depend in part on our ability to operate without infringing the proprietary rights of third parties. Other entities may have or obtain patents or proprietary rights that could limit our ability to manufacture, use, sell, offer for sale or import our products or impair our competitive position. Patent applications that we believe we do not infringe, but that we may ultimately be found to infringe, could be issued to third parties. In addition, to the extent that a third party develops new technology that covers our products or product candidates, we and our partners may be required to obtain licenses to that technology, which licenses may not be available or may not be available on commercially reasonable terms. Third parties may have or obtain valid and enforceable patents or proprietary rights that could block us from developing product candidates using our technology. Our failure to obtain a license to any technology that we require may materially harm our business, financial condition and results of operations. Moreover, our or our partners
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failure to maintain a license to any technology that we requires may also materially harm our business, financial condition and results of operations. Furthermore, we would be exposed to a threat of litigation.
In the pharmaceutical industry, significant litigation and other proceedings regarding patents, patent applications, trademarks and other intellectual property rights have become commonplace. The types of situations in which we may become a party to such litigation or proceedings include:
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we or our partners may initiate litigation or other proceedings against third parties seeking to invalidate the patents held by those third parties or to obtain a judgment that our products or processes do not infringe those third parties
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patents;
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if our competitors file patent applications that claim technology also claimed by us, we or our collaborators may be required to participate in interference or opposition proceedings to determine the priority of invention, which could jeopardize our patent rights and potentially provide a third party with a dominant patent position;
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if third parties initiate litigation claiming that our processes, products or use of products infringe their patent or other intellectual property rights, we and our collaborators will need to defend against such proceedings;
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if third parties initiate litigation claiming that our brand names infringe their trademarks, we and our collaborators will need to defend against such proceedings; and
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if a license to necessary technology is terminated, the licensor may initiate litigation claiming that our processes or products infringe or misappropriate their patent or other intellectual property rights and/or that we breached our obligations under the license agreement, and we and our collaborators would need to defend against such proceedings.
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These lawsuits would be costly and could affect our results of operations and divert the attention of our managerial and scientific personnel. There is a risk that a court would decide that we or our partners are infringing the third party
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s patents and would order us or our collaborators to stop the activities covered by the patents. In that event, we or our partners may not have a viable alternative to the technology protected by the patent and may need to halt work on the affected 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. An adverse outcome in any litigation or other proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. We may not be able to obtain any required licenses on commercially acceptable terms or at all. Any of these outcomes could have a material adverse effect on our business.
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The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of pat
ents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods either do not infringe the patent claims of the relevant patent
or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity en
joyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and divert management
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s time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid
infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring the
se actions to a successful conclusion. In addition, if we do not obtain a license, do not develop or obtain non-infringing technology, fail to defend an infringement action successfully or has infringed patents declared invalid, we may incur substantial mo
netary damages, encounter significant delays in bringing our product candidates to market and be precluded from manufacturing or selling our products.
The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time and financial resources. There are inherent risks and uncertainties associated with any litigation, including those involving intellectual property, which litigation and risks can be costly in of itself or create an environment making it challenging to raise additional capital.
If we or our partners fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our business.
We are currently party to an intellectual property license agreement with Tufts. The license agreement imposes, and we expect that future license agreements may impose, various diligence, milestone payment, royalty, insurance and other obligations on us. For example, we are required to use our best efforts to effect introduction of licensed products under the agreement into the United States commercial market. If we fail to comply with our obligations under the license, Tufts may have the right to terminate the license agreement, in which event we might not be able to market any product that is covered by the agreement, such as NUZYRA. Termination of the license agreement or reduction or elimination of our licensed rights may result in us having to negotiate a new or reinstated license with less favorable terms. If Tufts were to terminate its license agreement with us for any reason, our business could be materially harmed. In the event that we are unable to maintain the Tufts license, we may lose the ability to exclude third parties from offering substantially identical products for sale and may even risk the threat of a patent infringement lawsuit from our former licensor based on our continued use of its intellectual property. Either of these events could adversely affect our competitive business position and harm our business.
Under our license agreement with Tufts, we are responsible for prosecution and maintenance of the licensed patents and patent applications, including payment of necessary government fees. In the event that any of the licensed patents or patent applications unintentionally lapse or are otherwise materially diminished in value, our relationship with Tufts could be harmed. This could result in termination of the license, loss of the rights to control prosecution of the licensed patents and patent applications and/or liability to Tufts for any loss.
If we or our partners are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
In addition to patent protection, we also rely on other proprietary rights, including protection of trade secrets, know-how and confidential and proprietary information. To maintain the confidentiality of trade secrets and proprietary information, our policy is to enter into confidentiality agreements with our employees, consultants, collaborators and others upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual
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s relationship with us be kept confidential and not disclosed to third parties. Our agreements with employees and our personnel policies also provide that any inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. In the event of unauthorized use or disclosure of our trade secrets or proprietary information, these agreements, even if obtained, may not provide meaningful protection, particularly for our trade secrets or other confidential information. To the extent that our employees, consultants or contractors use technology or know-how owned by third parties in their work for us, disputes may arise between us and those third parties as to the rights in related inventions. To the extent that an individual who is not obligated to assign rights in intellectual property to us is rightfully an inventor
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of intellectual property, we may need to obtain an assignment or a license to that intellectual property from that individual. Such assignment or license may not be available on commercially reasonable terms or
at all.
Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets would impair our competitive position and may materially harm our business, financial condition and results of operations. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. In addition, others may independently discover trade secrets and proprietary information, and the existence of our own trade secrets affords no protection against such independent discovery.
As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously or concurrently employed at research institutions and/or 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 or that patents and applications we have filed to protect inventions of these employees, even those related to one or more of our product candidates, are rightfully owned by their former or concurrent employer. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to the USPTO and various foreign patent offices at various points over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we rely on our outside counsel to pay these fees when due. Additionally, the USPTO and various foreign patent offices require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with rules applicable to the particular jurisdiction. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If such an event were to occur, it could have a material adverse effect on our business. In addition, we are responsible for the payment of patent fees for patent rights that we have licensed from other parties. If any licensor of these patents does not itself elect to make these payments, and we fail to do so, we may be liable to the licensor for any costs and consequences of any resulting loss of patent rights.
If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the term of patents covering each of our product candidates, our business may be materially harmed.
Based on the FDA marketing approval of our products, one or more of our U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent term extension of up to five years for a patent covering an approved product as compensation for effective patent term lost during product development and the FDA regulatory review process, with the condition that this five year extension does not extend the patent for more than fourteen years from the approval date. However, we may not receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than our request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, the period during which we can enforce our patent rights for that product may not extend beyond the current patent expiration dates and our competitors may obtain approval to market competing products sooner. As a result, our revenue could be reduced, possibly materially.
Risks Related to the Notes
Servicing our debt, including the Notes, requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to regulatory, economic, financial, competitive and other factors beyond our control. We are a biopharmaceutical company that has not yet generated any revenue or profit from product sales. We expect to continue to incur losses as we prepare to commercialize NUZYRA and add infrastructure and personnel to support our product development efforts and operations. Accordingly, our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such 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 onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such
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time. 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.
The Notes are subordinated to our senior indebtedness, effectively subordinated to our secured indebtedness and structurally junior to any liabilities of our subsidiaries.
The
Notes are our general, unsecured, senior subordinated obligations and rank equally in right of payment with all of our future unsecured, senior subordinated indebtedness; senior to all of our future subordinated indebtedness; junior to all of our existing and future senior indebtedness, whether or not secured; effectively subordinated to all of our secured indebtedness, including secured indebtedness under the Hercules Loan Agreement, as amended, to the extent of the value of the assets securing such indebtedness; and structurally junior to the liabilities, including trade payables, of our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure debt ranking senior in right of payment to the Notes will be available to pay obligations on the Notes only after the secured debt has been repaid in full from these assets, and the assets of our subsidiaries will be available to pay obligations on the Notes only after all claims senior to the Notes have been repaid in full. There may not be sufficient assets remaining to pay amounts due on any or all of the Notes then outstanding. The indenture governing the Notes does not prohibit us from incurring additional senior debt or secured debt, nor does it prohibit any of our subsidiaries from incurring additional liabilities.
Despite our current debt levels, we may still incur substantially more debt or take other actions which would intensify the risks discussed above.
Despite our current consolidated debt levels, we and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. We are not restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. While the Hercules Loan Agreement, as amended, restricts our ability and the ability of our subsidiaries to issue or incur additional indebtedness, including secured indebtedness, if our loans under the Hercules Loan Agreement, as amended, mature or are repaid, we may not be subject to such restrictions under the terms of any subsequent indebtedness.
We may not have the ability to raise the funds necessary to repurchase the Notes upon a fundamental change, and our existing or future debt may contain limitations on our ability to repurchase the Notes.
Holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased,
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accrued and unpaid interest, if any. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor. In addition, our ability to repurchase the Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness that exist at the time of the repurchase. The Hercules Loan Agreement, as amended, currently limits our ability to repurchase the Notes. Our failure to repurchase Notes at a time when the repurchase is required by the indenture governing the Notes would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under the Hercules Loan Agreement, as amended, and/or agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes.
In addition, our borrowings under the Hercules Loan Agreement, as amended, are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease.
The Hercules Loan Agreement, as amended, limits our ability to pay any cash amount upon repurchase of the Notes.
The Hercules Loan Agreement, as amended, prohibits us from making any cash payments to repurchase the Notes upon a fundamental change. Any new credit facility that we may enter into may have similar restrictions.
Our failure to repurchase the Notes as required under the terms of the Notes would constitute a default under the indenture governing the Notes and permit holders of the Notes to accelerate our obligations under the Notes. A default under the indenture or the fundamental change itself could also lead to a default under the Hercules Loan Agreement, as amended, or agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes.
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Future sales of our common s
tock or equity-linked securities in the public market could lower the market price for our common stock.
In the future, we may sell additional shares of our common stock or equity-linked securities to raise capital. In addition, a substantial number of shares of our common stock are reserved for issuance upon the exercise of stock options and upon conversion of the Notes. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock or equity-linked securities, or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-linked securities.
Risks Related to Our Common Stock
The trading price of our common stock is volatile.
The trading price of our common stock could be subject to significant fluctuations. Market prices for securities of pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the trading price of our common stock to fluctuate include:
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the commercial performance of NUZYRA and SEYSARA;
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our ability to maintain and expand regulatory approval for NUZYRA;
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issues in manufacturing NUZYRA;
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the results of our current and any future clinical trials of NUZYRA or our product candidates;
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the entry into, or termination of, key agreements, including key commercial partner agreements;
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the initiation of, material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights or defend against the intellectual property rights of others;
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announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;
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adverse publicity relating to the antibiotics market, including with respect to other products and potential products in such market;
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the introduction of technological innovations or new therapies that compete with our products;
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the loss of key employees;
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changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
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general and industry-specific economic conditions that may affect our research and development expenditures;
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changes in the structure of healthcare payment systems; and
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period-to-period fluctuations in our financial results, including, in particular, our use of cash in operations.
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Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.
In the past, following periods of volatility in the market price of a company
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s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.
We do not anticipate that we will pay any cash dividends in the foreseeable future.
On May 14, 2014, we announced that our Board of Directors had approved a special cash dividend of $15.96 per share. Cash was distributed for this dividend to our stockholders of record at the close of business on May 26, 2014. On October 14, 2014, we announced that our Board of Directors had approved a special dividend of $8.01 per share. Cash was distributed for this dividend to our stockholders of record at the close of business on October 24, 2014.
We expect that we will retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain, if any, for the foreseeable future.
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Anti-takeover provisions in
our charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our management.
Provisions in our certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, or DGCL, which prohibits stockholders owning in excess of 15% of our voting stock from merging or combining with us. Although we believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.
Future sales of shares by existing stockholders could cause the trading price of our common stock to decline.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. As of September 30, 2018, approximately 3.0 million shares of common stock are held by our directors, executive officers and other affiliates and are subject to volume limitations under Rule 144 under the Securities Act. In addition, approximately 5.7 million shares of common stock that are subject to outstanding options and restricted stock units as of September 30, 2018 will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rule 144 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
Because our merger resulted in an ownership change under Section 382 of the Internal Revenue Code for Transcept, Transcept’s pre-merger net operating loss carryforwards and certain other tax attributes are subject to limitations. The net operating loss carryforwards and other tax attributes of the former Paratek entity and us may also be subject to limitations as a result of ownership changes.
If a corporation undergoes an
“
ownership change
”
within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382, the corporation
’
s net operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation
’
s equity ownership by certain stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The Merger resulted in an ownership change for Transcept and, accordingly, Transcept
’
s net operating loss carryforwards and certain other tax attributes are subject to limitations on their use after the Merger. Old Paratek
’
s net operating loss carryforwards may also be subject to limitation as a result of prior shifts in equity ownership and/or the Merger. Additional ownership changes in the future could result in additional limitations on Transcept
’
s, Old Paratek
’
s and our net operating loss carryforwards. Consequently, even if we achieve profitability, we may not be able to utilize a material portion of Transcept
’
s, Old Paratek
’
s or our net operating loss carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations.
If securities or industry analysts do not publish research or reports or publish inaccurate or unfavorable research about us, the trading price and trading volume of our common stock could decline.
The trading market for our common stock is influenced by the research and reports that securities or industry analysts publish about us, our business and our common stock. As of September 30, 2018, we had research coverage by 12 securities analysts. If the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research regarding us or our business model, technology or stock performance, the trading price of our common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our common stock to decline. Moreover, the unpredictability of our financial results likely reduces the certainty, and therefore reliability, of the forecasts by securities or industry analysts of our future financial results, adding to the potential volatility of the trading price of our common stock.
Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
The trading market for our common stock is influenced by the research and reports that securities or industry analysts publish. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and The Nasdaq Global Market rules. The requirements of these rules and regulations have increased and will continue to significantly increase our legal and financial compliance costs, including costs associated with the hiring of additional personnel, making some activities more difficult, time-consuming or costly, and may also place undue strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition.
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The Sa
rbanes-Oxley Act requires, among other things, that we maintain disclosure controls and procedures and internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place, as well as
maintaining these controls and procedures, is a costly and time-consuming effort that needs to be re-evaluated frequently. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires that we annually evaluate our internal control over financial reporti
ng to enable management to report on, and our independent auditors to audit as of the end of each fiscal year, the effectiveness of those controls. In connection with the Section 404 requirements, both we and our independent registered public accounting fi
rm test our internal controls and could, as part of that documentation and testing, identify material weaknesses, significant deficiencies or other areas for further attention or improvement.
Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, require the hiring of additional finance, accounting and other personnel, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, adequate internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could cause the market value of our common stock to decline.
Various rules and regulations applicable to public companies make it more difficult and more expensive for us to maintain directors
’
and officers
’
liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors
’
and officers
’
liability insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent for purposes of The Nasdaq Global Market rules, will be significantly curtailed.
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