RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider the risks described below and the risks set forth in the
Risk Factors section of our most recent Annual Report on Form
10-K
filed with the SEC, as revised or supplemented by our Quarterly Reports on Form
10-Q
filed
with the SEC since our most recent Annual Report on Form
10-K,
each of which is incorporated by reference into this prospectus. You should also carefully consider the other information included or incorporated
by reference in this prospectus before making an investment decision. Our business, financial condition, results of operations and cash flows could be materially adversely affected by any of these risks. The market or trading price of our common
stock could decline due to any of these risks. In addition, please read Disclosure Regarding Forward-Looking Statements in this prospectus, where we describe additional uncertainties associated with our business and the forward-looking
statements included or incorporated by reference in this prospectus. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.
Risks Related to this Offering
Management will
have broad discretion as to the use of proceeds from this offering and we may use the net proceeds in ways with which you may disagree.
We intend
to use the net proceeds of this offering for working capital needs, capital expenditures, and other general corporate purposes in pursuit of advancing our commercial, clinical, and
pre-clinical
efforts. Our
management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Accordingly, you will be
relying on the judgment of our management on the use of net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Our failure to apply these funds
effectively could have a material adverse effect on our business, delay the development of our product candidates and cause the price of our common stock to decline.
The offering price will be set by our Board of Directors and does not necessarily indicate the actual or market value of our common stock.
Our Board of Directors will approve the offering price and other terms of this offering after considering, among other things: the number of shares authorized
in our certificate of incorporation; the current market price of our common stock; trading prices of our common stock over time; the volatility of our common stock; our current financial condition and the prospects for our future cash flows; the
availability of and likely cost of capital of other potential sources of capital; and market and economic conditions at the time of the offering. The offering price is not intended to bear any relationship to the book value of our assets or our past
operations, cash flows, losses, financial condition, net worth or any other established criteria used to value securities. The offering price may not be indicative of the fair value of the common stock.
The Series A Preferred Stock is an unlisted security and there is no public market for it.
There is no established public trading market for the Series A Preferred Stock, and we do not expect a market to develop. In addition, the Series A Preferred
Stock is not listed, and we do not intend to apply for listing of the Series A Preferred Stock on any securities exchange or trading system. Without an active market, the liquidity of the Series A Preferred Stock is limited, and investors may be
unable to liquidate their investments in the Series A Preferred Stock.
The warrants may not have any value.
The warrants will be exercisable for five years from the closing date at an initial exercise price per share of
$ . In the event that the price of a share of our common stock does not exceed the exercise price of the warrants during the period when the warrants are
exercisable, the warrants may not have any value.
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A warrant does not entitle the holder to any rights as common stockholders until the holder exercises the
warrant for shares of our common stock.
Until you acquire shares of our common stock upon exercise of your warrants, the warrants will not
provide you any rights as a common stockholder. Upon exercise of your warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs on or after the exercise date.
You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.
You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of shares offered in this offering at an
assumed public offering price of $ per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us,
investors in this offering can expect an immediate dilution of approximately $ per share. See Dilution below for a more detailed discussion
of the dilution you will incur if you purchase our common stock in the offering. In addition, the conversion of shares of Series A Preferred Stock and exercise of the warrants will result in the issuance of additional shares of common stock that
will result in significant dilution to holders of our common stock.
Issuances of shares of common stock or securities convertible into or
exercisable for shares of common stock following this offering, as well as the exercise of convertible securities outstanding, will dilute your ownership interests and may adversely affect the future market price of our common stock.
We may choose to raise additional capital subject to market conditions or strategic considerations even if we believe we have sufficient funds for our current
or future operating plans. If additional capital is raised through the sale of equity or convertible debt securities, or perceptions that those sales could occur, the issuance of these securities could result in further dilution to investors
purchasing our common stock in this offering or result in downward pressure on the price of our common stock, and our ability to raise capital in the future.
In addition, we have a significant number of securities convertible into shares of our common stock outstanding, including options, convertible notes and
warrants. If these securities are exercised, you may incur further dilution. Moreover, to the extent that we issue additional securities convertible into or exchangeable for shares of our common stock in the future and those options, warrants or
other securities are exercised, converted or exchanged, you may experience further dilution.
A large number of shares issued in this offering may
be sold in the market following this offering, which may depress the market price of our common stock.
A large number of shares issued in this
offering may be sold in the market following this offering, which may depress the market price of our common stock. Sales of a substantial number of shares of our common stock in the public market following this offering could cause the market price
of our common stock to decline. If there are more shares of common stock offered for sale than buyers are willing to purchase, then the market price of our common stock may decline to a market price at which buyers are willing to purchase the
offered shares of common stock and sellers remain willing to sell the shares. All of the securities issued in the offering will be freely tradable without restriction or further registration under the Securities Act.
Risks Related to Our Business
Our cash resources
will only be sufficient to fund our operations through the fourth quarter of 2018. Substantial doubt exists as to our ability to continue as a going concern. Additional funds may not be available on terms that are acceptable to us or at all.
Our independent registered public accounting firm for the fiscal year ended December 31, 2017 has indicated in its audit opinion, contained
in our consolidated financial statements included in our Annual Report on
Form 10-K, that
our current liquidity position raises substantial doubt about our ability to continue as a going concern.
Our management believes that at September 30, 2018, the additional funds received under the first closing in October of 2018 of $2 million
along with the cash balance of $2.9 million will be sufficient to fund our operations at least through December 31, 2018. As reflected in the accompanying condensed consolidated financial statements, we have incurred significant recurring
operating losses and negative cash flows from its operations and, as of September 30, 2018, had an accumulated deficit of $467.4 million, a total shareholders deficit of $23.5 million and working capital of $0.7 million.
These factors among others, raise substantial doubt about our ability to continue as a going concern. Management expects operating losses to continue for the foreseeable future including the year ending December 31, 2018. As of
September 30, 2018, our current assets of $3.5 million are more than current liabilities of $2.8 million by approximately $0.7 million. In February 2018, the Board of Directors, or the Board, implemented temporary measures
intended to preserve our cash resources until additional sources of capital can be secured, including the reduction of cash compensation and severance benefits for certain officers and the reduction of cash compensation for members of the Board. On
April 13, 2018, we entered into a note purchase agreement whereby entities affiliated with Grifols and First Eagle, our two largest shareholders beneficially owning collectively approximately 75% of our common stock as of September 30,
2018 and owning all of the Convertible Notes and Warrants described in Note 6 to the condensed consolidated financial statements included in our Quarterly Report on
Form 10-Q
for the quarterly period
ended September 30, 2018 agreed to purchase up to approximately $7 million aggregate principal amount of bridge notes or the Promissory Notes. We completed the first closing under the note purchase agreement on April 13, 2018, at
which time the Company issued and sold approximately $2 million aggregate principal amount of Promissory Notes to the lenders thereunder. After the initial closing, we held five more closings monthly thereafter and received installment payments
totaling an additional approximately $5 million.
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After quarter end, we received an additional $2 million on October 25, 2018 from Grifols under the note
purchase agreement described in Note 13 to the condensed consolidated financial statements presented in our Quarterly Report on Form
10-Q
for the quarterly period ended September 30, 2018. As noted above,
our management currently believes that at September 30, 2018, the additional funds received under the first closing of $2 million in October 2018 along with the Companys cash balance of approximately $2.9 million will be
sufficient to fund operations through at least the fourth quarter of 2018. However, because of the expected losses and negative cash flows from operations, we will continue to require additional capital through the issuance of debt or equity
securities, royalty financing transactions, strategic transactions or otherwise, to fund our operations and continue the development of our lead product candidate Apulmiq. We will not be able to maintain our current level of regulatory and product
development activity and there is substantial doubt about our companys ability to continue as a going concern unless we raise additional capital in 2019. We cannot assure you that the closing condition to the subsequent closing will be
satisfied. The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations. We cannot assure you that we will be successful in raising such additional capital on
favorable terms or at all. Not achieving such funding on a timely basis would materially harm our business, financial condition and results of operations and could require us to delay or reduce the scope of all or a portion of our development
programs, dispose of our assets or technology or to cease operations. Accordingly, we may not be able to continue as a going concern. For more information, see Note 11 (Going Concern) to the condensed consolidated financial statements presented in
our Quarterly Report on Form
10-Q
for the quarterly period ended September 30, 2018.
Changing circumstances
may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently expected because of circumstances beyond our control. For these reasons, we are unable to estimate the actual funds we
will require for development and any approved marketing and commercialization activities.
We have a significant amount of debt, which may adversely
affect our ability to operate our business and our financial position and our ability to secure additional financing in the future.
As of
November 30, 2018, we had $32 million in principal under our outstanding note securities. Our significant amount of outstanding indebtedness may make it difficult for us to run our business effectively or raise the capital we need to
continue our operations. We are also subject to standard event of default provisions, including in the event of a material adverse change, under our outstanding note securities that, if triggered, would allow the debt to be accelerated, which could
significantly deplete our cash resources, cause us to raise additional capital at unfavorable terms, require us to sell portions of our business or result in us becoming insolvent.
We have received a CRL from the FDA which states that it cannot approve the NDA for Apulmiq in its present form. Even if we resubmit the NDA for
Apulmiq, the FDA may not approve Apulmiq for marketing.
We have focused primarily on the development of our lead product candidate Apulmiq for
the treatment of NCFBE. In July 2017, we submitted the NDA for Apulmiq to the FDA based on the positive results from
the ORBIT-4 study
in the Phase 3 clinical program for Apulmiq and confirmatory
evidence from
the ORBIT-2 and ORBIT-3 studies.
In January 2018, we received a CRL from the FDA regarding the NDA for Apulmiq which states that the
FDA determined it cannot approve the NDA in its present form and provides specific reasons for this action along with recommendations needed for resubmission; the areas of concern include the lack of clinical data showing our product is more
effective than a placebo, human factors validation study and product quality. The recommendations in the CRL include an independent third party verification of the Phase 3 results via analyses of source data as per the
pre-approved
statistical analysis plan and an additional Phase 3 clinical trial or trials that demonstrates a significant treatment effect on clinically meaningful endpoints which could evaluate
the co-primary endpoints
of frequency and severity of exacerbations to assess for durable evidence of efficacy over a period of two years (or more, if scientifically justified). The CRL also included a
request to conduct another Human Factors Study to demonstrate that the product packaging and instructions for use are effective, and the CRL requested, among other things, additional product quality information with respect to microbiology and a new
in vitro drug release method development report. The Company has completed Type B and Type C post-action meetings with the FDA to discuss the topics covered in the CRL with the view to developing plans to move towards resubmission of the Apulmiq
NDA. While we currently plan to resubmit the NDA for Apulmiq, we cannot assure you that we will be able to resubmit the NDA, that the information previously provided, or to be provided, to the FDA will be adequate to address the recommendations made
in the Apulmiq CRL or that we will be successful in obtaining FDA approval of Apulmiq. Even if we resubmit an NDA for Apulmiq, the FDA could require us to complete further clinical, Human Factors or other studies, which could further delay or
preclude any approval of the NDA and require us to obtain significant additional funding. In addition, the FDA may choose not to approve our NDA for any of a variety of reasons, including a decision related to the safety or efficacy data for
Apulmiq, or for any other issues that it may identify related to our development of Apulmiq for the treatment of NCFBE.
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If we are unable to mitigate these or other potential risks, our revenue, operating results and financial
condition may be adversely impacted.
An MAA submission was made to the EMA in early March, 2018. On March 29, 2018 Aradigm received EMA validation
of the submission and the EMA review process was initiated. The list of Day 120 questions has been received and is being addressed. There is no assurance that we will be able to provide answers to the questions or that our answers will be acceptable
to the EMA nor can we provide assurance as to eventual approval by the EMA.
As planned in March 2018, we submitted a marketing authorization
application, or MAA, to the EMA, seeking approval for Linhaliq for the treatment of NCFBE patients suffering chronic lung infection with
P. aeruginosa.
Our submission is based on the positive ORBIT-4 clinical trial, with a primary
endpoint of time to first exacerbation and the secondary endpoints of frequency of all exacerbations and severe exacerbations. Supporting evidence was provided from the identically-designed ORBIT 3 clinical trial, a Phase 2 study of Apulmiq and
proprietary preclinical studies, as well as referencing additional information about ciprofloxacin from publicly available sources. Two previous Scientific Advice procedures indicated that the EMA would focus on the totality of clinical evidence,
including primary and secondary exacerbation endpoints in their decision-making. The EMA completed its validation of the MAA and the formal start date of the MAA review procedure was March 29, 2018.
In July of 2018, we received the customary Day 120 letter from the EMA which requests additional analyses or clarification of clinical,
non-clinical or product quality data. We are in the process of completing the analyses and responses for submission to the EMA. The EMA review of the MAA for Linhaliq will be according to standard timelines, with an opinion of the Committee for
Medicinal Products for Human Use, or CHMP, expected in the second quarter of 2019. The time needed by us to respond to EMA questions during the MAA review will trigger formal clock-stops of the procedure and add several months to the nominal
duration, until the final CHMP opinion will be issued. There can be no assurance our responses to the EMA questions during the process will be acceptable and approval of Linhaliq obtained. The process may continue through Day 180 outstanding issues
from the EMA. There can be no assurance our answers to response to any CHMP questions will be acceptable or that we would gain approval in the time frame allotted by the EMA procedure.
If the CHMP opinion is positive, a final decision regarding the MAA assessment is carried out by the European Commission within 2-3 months. There can be no
assurance the members of the European Commission would approve marketing of the product under circumstances that would be acceptable.
Changes to
our management and Board of Directors may cause uncertainty regarding the future of our business, and may adversely impact employee hiring and retention, our stock price, and our revenue, operating results, and financial condition.
Since February 2018, there have been significant changes in our management and board of directors. Several members of management have departed the Company.
Effective February 11, 2018, Igor Gonda, Ph.D., President and Chief Executive Officer; Juergen Froehlich, M.D., Chief Medical Officer; and Nancy Pecota, Vice President, Finance, Chief Financial Officer and Corporate Secretary resigned all
offices and positions held by him or her with Aradigm. In addition, in February, 2018, Dr. Gonda and David Bell resigned from the Board of Directors. Also, in February 2018, our Board approved temporary measures intended to preserve cash
resources until additional sources of capital can be secured, and a reduction in force occurred. Additionally, Dr. Gonda, Dr. Froehlich and
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Ms. Pecota were retained by the company as consultants. On May 31, 2018, Dr. Froehlich was rehired as the Companys Chief Medical Officer. Dr. Theresa Matkovits was
appointed to the Board effective as of June 29, 2018. These changes, and the potential for additional changes to our management, organizational structure and strategic business plan, may cause speculation and uncertainty regarding our future
business strategy and direction. These changes may cause or result in:
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disruption of our business or distraction of our employees and management;
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difficulty in recruiting, hiring, motivating and retaining talented and skilled personnel;
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stock price volatility; and
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difficulty in negotiating, maintaining or consummating business or strategic relationships or transactions.
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If we are unable to mitigate these or other potential risks, our revenue, operating results and financial condition may be adversely
impacted.
We have a history of net losses and a large accumulated deficit, we expect to incur net losses for at least the foreseeable future, and
we may never achieve or maintain profitability.
We have never been profitable and have incurred significant net losses in each year since our
inception. As of September 30, 2018, we have an accumulated deficit of approximately $467.4 million. We have not had any direct product sales and do not anticipate receiving revenues from the sale of any of our products in 2018, if ever.
We expect to incur net losses over the next several years and may never become profitable. While our agreement with our partner Grifols has resulted in reduced net operating losses and capital expenditures as a portion of our research and
development expenses for the Apulmiq program was reimbursed by Grifols through 2015, we expect to continue to incur losses for the foreseeable future, including the year ending December 31, 2018, as we:
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continue drug product development efforts;
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conduct preclinical testing and clinical trials;
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pursue additional applications for our existing delivery technologies; and
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outsource the commercial-scale production of our products.
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The amount of future losses is uncertain and will depend, in part, on the rate of growth of our expenses.
To achieve and sustain profitability, we must, alone or with others such as Grifols, successfully develop, obtain regulatory approval for, manufacture, market
and sell our products. We expect to incur substantial expenses in our efforts to develop and commercialize products, and we may never generate sufficient product or contract research revenues to become profitable. Even if we achieve profitability in
the future, we may not be able to sustain profitability in subsequent periods. We are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Even if we are able to complete
the processes described above, we anticipate incurring significant costs associated with seeking regulatory approval for our product candidates.
We
are subject to extensive regulation, including the requirement of approval before any of our product candidates can be marketed. We may not obtain regulatory approval for our product candidates on a timely basis, or at all.
Drug development is an inherently uncertain process with a high risk of failure at every stage of development. We and our products are subject to extensive
and rigorous regulation in the United States by the federal government, principally the FDA, by state and local government agencies, and also by governmental and regulatory agencies outside the United States, such as the EMA. Both before and after
regulatory approval, the development, testing, manufacture, quality control, labeling, storage, approval, advertising, promotion, sale, distribution, and export of our potential products are subject to regulation. Pharmaceutical products that are
marketed abroad are also subject to regulation by foreign governments. Our products cannot be marketed in the United States without FDA approval.
The
process for obtaining FDA approval for drug products is generally lengthy, expensive and uncertain. Despite the time and expense expended, regulatory approval is never guaranteed. The FDA and foreign regulatory agencies can delay approval of, or
refuse to approve, our product candidates for a variety of reasons, including failure to meet safety and/or efficacy endpoints in our clinical trials.
Regulatory authorities may delay or not approve our product candidates even if the product candidates meet safety and efficacy endpoints in clinical
trials or the approvals may be too limited for us to earn sufficient revenues.
Our pharmaceutical product candidates may not be approved even if
they achieve their safety and efficacy endpoints in clinical trials. Even if a product candidate is approved, it may be approved for fewer or more limited indications than requested or the approval may be subject to the performance of significant
post-marketing studies that can be long and costly. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Any limitation, condition or
denial of approval or label changes would have an adverse effect on our business, reputation, and results of operations.
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Even if we are granted initial FDA or EMA approval for any of our product candidates, we may not be able to
maintain such approval, which would reduce our revenues.
Even if we are granted initial regulatory approval for a product candidate, the FDA, the
EMA and similar foreign regulatory agencies can limit or withdraw product approvals for a variety of reasons, including failure to comply with regulatory requirements, changes in regulatory requirements, problems with manufacturing facilities or
processes or the occurrence of unforeseen problems, such as the discovery of previously undiscovered side effects. Failure to comply with applicable regulatory requirements can, among other things, result in warning letters, imposition of civil
penalties or other monetary payments, delay in approving or refusal to approve a product candidate, suspension or withdrawal of regulatory approval, product recall or seizure, operating restrictions, interruption of clinical trials or manufacturing,
injunctions and criminal prosecution. If we are able to obtain any product approvals, they may be limited or withdrawn, or we may be unable to remain in compliance with regulatory requirements. Both before and after approval we, our present and
future collaborators and our products are subject to a number of additional requirements. For example, certain changes to the approved product, such as adding new indications, certain manufacturing changes and additional labeling claims are subject
to additional FDA or EMA review and approval. Advertising and other promotional material must comply with FDA or EMA requirements. We, our collaborators and our manufacturers will be subject to continuing review and periodic inspections by the FDA,
the EMA and other authorities, where applicable, and must comply with ongoing requirements, including the FDAs GMP requirements. Once the FDA or the EMA approves a product, a manufacturer must provide certain updated safety and efficacy
information, submit copies of promotional materials to the FDA or the EMA and make certain other required reports are provided. Product approvals may be withdrawn if regulatory requirements are not complied with or if problems concerning safety or
efficacy of the product occur following approval. Any limitation or withdrawal of approval of any of our products could delay or prevent sales of our products, which would adversely affect our revenues. Further continuing regulatory requirements may
involve expensive ongoing monitoring and testing requirements.
We are a development-stage business and will require substantial capital to complete
the development of our product candidates and commercialize them. Any such future financing could result in dilution to shareholders or increased fixed payment obligations and could also result in restrictive covenants or other operating
restrictions that could adversely impact our ability to conduct our business.
We are a development-stage company, and our ability to generate
revenue and become profitable depends on our ability to successfully complete the development of our product candidates. All of our potential products are in research or development, and we will need to raise additional capital prior to approval and
commercialization of our lead product candidate, Apulmiq. Our potential drug products require extensive research and development,
including pre-clinical and
clinical testing. Our potential products
also may involve lengthy regulatory reviews before they can be sold. Because none of our product candidates has yet received approval by the FDA or the EMA, we cannot assure you that our research and development efforts will be successful, any of
our potential products will be proven safe and effective, or regulatory clearance or approval to sell any of our potential products will be obtained. We cannot assure you that any of our potential products can be manufactured in commercial
quantities with quality systems acceptable to the regulatory authorities at an acceptable cost or marketed successfully. We may abandon the development of some or all of our product candidates at any time and without prior notice. We must incur
substantial up-front expenses
to develop and commercialize products and failure to achieve commercial feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory approval or successfully
manufacture and market products will negatively impact our business. Running clinical trials and developing an investigational drug for commercialization involve significant expense, and any unexpected delays or other issues in the development
process can result in significant additional expense.
Until we can generate a sufficient amount of revenue, we expect to finance future cash needs
through public or private equity financings, royalty or debt financings, corporate alliances, joint ventures or licensing agreements. We may sell additional equity or debt securities to fund our operations, which would result in dilution to all of
our shareholders or impose restrictive covenants that may adversely impact our business. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our
ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Additional funds may not be
available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay or reduce the scope of or eliminate one or more of our research or development programs or our
commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves, or cease operations and liquidate.
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We are in a highly competitive market, and our competitors have developed or may develop alternative
therapies for our target indications, which would limit the revenue potential of any product we may develop.
We compete with pharmaceutical,
biotechnology and drug delivery companies, hospitals, research organizations, individual scientists and nonprofit organizations engaged in the development of drugs and therapies for the disease indications we are targeting. Our competitors may
succeed, and many already have succeeded, in developing competing technologies for the same disease indications, obtaining FDA or EMA approval for products or gaining acceptance for the same markets that we are targeting. If we are not first
to market, it may be more difficult for us and our present and future collaborators to enter markets as second or subsequent competitors and become commercially successful.
We are aware of a number of companies that are developing or have developed therapies to address indications we are targeting, including major pharmaceutical
companies such as Bayer. For example, Bayer has developed an inhaled dry powder formulation of ciprofloxacin for the treatment of respiratory infections in CF and NCFBE. Bayer filed an NDA for U.S. approval and was accepted for Priority Review. In
November 2017, the FDAs Advisory Committee voted not to recommend Bayers dry powder ciprofloxacin to be approved for the treatment of bronchiectasis. Bayer in its 2017 Annual Report have announced that they have decided to discontinue
development of Cipro DPI in NCFBE for the time being and will evaluate possible further options for this asset.
There are a number of other inhaled
products under development to treat respiratory infections, including a nebulized levofloxacin by Raptor (acquired by Horizon) for CF and inhaled colistin for bronchiectasis. Additionally, Insmeds drug Arikayce (amikacin liposome inhalation
suspension), for the treatment of lung disease caused by a group of bacteria,
Mycobacterium avium
, was approved in a limited population of patients in September of 2018. These and many other potential competitors have greater research
and development, manufacturing, marketing, sales, distribution, financial and managerial resources and experience than we have and may have products and product candidates that are on the market or in a more advanced stage of development than our
product candidates. Our ability to earn product revenues and our market share would be substantially harmed if any existing or potential competitors brought a product to market before we or our present and future collaborators were able to, or if a
competitor introduced at any time a product superior to or more cost-effective than ours.
In addition, we believe there are a number of additional drug
candidates and pulmonary delivery technologies in various stages of development that, if approved, could compete with any future products we may develop.
Because our inhaled ciprofloxacin programs may rely on the FDAs and EMAs grant of orphan drug designation for potential market exclusivity,
the product may not be able to obtain market exclusivity and could be barred from the market in the US for up to seven years or European Union for up to ten years.
The FDA has granted orphan drug designation for our liposomal ciprofloxacin drug product candidate for the management of CF and BE and to our ciprofloxacin
for inhalation drug product for the management of bronchiectasis. FDA also granted orphan drug designation to our proprietary drug product of liposomal ciprofloxacin for the management of CF. Orphan drug designation is intended to encourage research
and development of new therapies for diseases that affect fewer than 200,000 patients in the United States. The designation provides the opportunity to obtain market exclusivity, even in the absence of a granted patent or other intellectual property
protection, for seven years from the date of the FDAs approval of an NDA. However, the market exclusivity is granted only to the first chemical entity to be approved by the FDA for a given indication. Therefore, if another similar inhaled
ciprofloxacin product were to be approved by the FDA for a CF or NCFBE indication before our product, then we may be blocked from launching our product in the United States for seven years, unless we are able to demonstrate to the FDA clinical
superiority of our product on the basis of safety or efficacy. For the NCFBE indication, Bayer has obtained orphan drug status for their inhaled powder formulation of ciprofloxacin in the United States for the treatment of bronchiectasis and in the
United States and European Union for the treatment of CF. Bayer filed an NDA for U.S. approval, however in November 2017 the FDAs Advisory Committee voted not to recommend Bayers dry powder ciprofloxacin to be approved for the treatment
of bronchiectasis. Bayer in its 2017 Annual Report have announced that they have decided to discontinue development of Cipro DPI in NCFBE for the time being and will evaluate possible further options for this asset.
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In August 2009, the EMA granted orphan drug designation to our inhaled liposomal ciprofloxacin drug product
candidate
Lipoquin (ARD-3100)
for the treatment of lung infections associated with CF. Under European guidelines, Orphan Medicinal Product Designation provides 10 years of potential market exclusivity if
the product candidate is the first product candidate for the indication approved for marketing in the EU. We may seek to develop additional products that incorporate drugs that have received orphan drug designations for specific indications. In each
case, if our product is not the first to be approved by the FDA or European Medicines Agency for a given orphan indication, we may not be able to access the target market in the United States and/or the EU, which would adversely affect our ability
to earn revenues.
Our current and future dependence on collaborators and other third parties may delay or require that we terminate certain of our
programs, and any such delay or termination would harm our business prospects and stock price.
We used contract research organizations, or CROs,
to conduct our global Phase 3 clinical trials and are using contract research organizations for other analysis and testing activities. We may not be able to maintain satisfactory contract research arrangements, or we may have contractual disputes
with such CROs that could adversely impact the timelines for the delivery of data or other materials from the CRO. If our CROs are delayed in their activities or issues are uncovered regarding the quality of the data provided by the CROs it could
result in significant delays in our Apulmiq program and adversely impact our ability to obtain regulatory approval for our product candidate.
Our
commercialization strategy for certain of our product candidates depends on our ability to enter into or maintain agreements with collaborators, such as our collaboration with Grifols, and to obtain assistance and funding for the development and
potential commercialization of our product candidates. Supporting diligence activities conducted by potential collaborators and negotiating the financial and other terms of a collaboration agreement are long and complex processes with uncertain
results. Collaborations may involve greater uncertainty for us, as we have less control over certain aspects of our collaborative programs than we would over a proprietary development and commercialization program. We may determine that continuing a
collaboration under the terms provided is not in our best interest and, if we are able to under the terms of the agreement, we may terminate the collaboration. Our collaborators could delay or terminate their agreements with us, and our products
subject to collaborative arrangements may never be successfully commercialized. Under our existing collaboration agreement with Grifols, we have granted Grifols exclusive rights with respect to inhaled ciprofloxacin compounds for other indications
besides the treatment of NCFBE, and we have limited ability to terminate that agreement.
Further, our present or future collaborators may pursue
alternative technologies or develop alternative products either on their own or in collaboration with others, including our competitors, and the priorities or focus of our collaborators may shift such that our programs receive less attention or
resources than we would like, or they may be terminated altogether. Any such actions by our collaborators may adversely affect our business prospects and ability to earn revenues. In addition, we could have disputes with our present or future
collaborators, such as the interpretation of terms in our agreements. Any such disagreements could lead to delays in the development or commercialization of any potential products or could result in time-consuming and expensive litigation or
arbitration, which may not be resolved in our favor.
Even with respect to certain other programs that we intend to commercialize ourselves, or programs
that Grifols has declined its exclusive right to fund and commercialize, we may enter into agreements with collaborators to share in the burden of conducting clinical trials, manufacturing and marketing our product candidates or products. In
addition, our ability to apply our proprietary technologies to develop proprietary drugs will depend on our ability to establish and maintain licensing arrangements or other collaborative arrangements with the holders of proprietary rights to such
drugs. We may not be able to establish such arrangements on favorable terms or at all, and our future collaborative arrangements may not be successful.
We depend, and will continue to depend, on contract manufacturers and collaborators: if they do not perform as expected, our revenues and customer
relations will suffer.
We do not have the ability to manufacture the materials we use in
our pre-clinical and
clinical trials and commercial operations. Rather, we rely on various third-party contract manufacturers to produce our products. There may be long lead times to obtain
materials. There can be no assurance that we will be able to identify, contract with, qualify and obtain prior regulatory approval for additional sources of materials. We may also not be able to maintain satisfactory contract manufacturing
arrangements with our current contract manufacturers. If we are not, there may be a significant delay before we find an alternative contract manufacturer or we may not find an alternative contract
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manufacturer at all. If there are any interruptions in this supply for any reason, including a decision by the third parties to discontinue manufacturing, technical difficulties, labor disputes,
natural or other disasters, or a failure of the third parties to follow regulations, we may not be able to obtain regulatory approvals for our investigational drug candidates and may not be able to successfully commercialize these investigational
drug candidates.
Our third-party contract manufacturers and collaborative partners may encounter delays and problems in manufacturing our investigational
drug candidates and future commercial products for a variety of reasons, including accidents during operation, failure of equipment, delays in receiving materials, natural or other disasters, political or governmental changes, or other factors
inherent in operating complex manufacturing facilities. Supply-chain management is difficult. Commercially available starting materials, reagents, excipients, and other materials may become scarce, more expensive to procure, or not meet quality
standards, and we may not be able to obtain favorable terms in agreements with subcontractors. Our third-party contract manufacturers may not be able to operate manufacturing facilities in a cost-effective manner or in a time frame that is
consistent with our expected future manufacturing needs. If our third-party manufacturers cease or interrupt production or if our third-party manufacturers and other service providers fail to supply materials, products or services to us for any
reason, such interruption could delay progress on our programs, or interrupt the commercial supply, with the potential for additional costs and lost revenues. If this were to occur, we might also need to seek alternative means to fulfill our
manufacturing needs.
Further, we, our contract manufacturers and our collaborators are required to comply with the FDAs GMP requirements that
relate to product testing, quality assurance, manufacturing and maintaining records and documentation. We and our contract manufacturers or our collaborators may not be able to comply with the applicable GMP and other FDA regulatory requirements for
manufacturing, which could result in an enforcement or other action, prevent commercialization of our product candidates and impair our reputation and results of operations.
If any products that we or our collaborators may develop do not attain adequate market acceptance by healthcare professionals and patients, our business
prospects and results of operations will suffer.
Even if we or our collaborators successfully develop one or more products, such products may not
be commercially acceptable to healthcare professionals and patients, who will have to choose our products over alternative products for the same disease indications. Many of these alternative products may be more established and acceptable than
ours. For our products to be commercially viable, we will need to demonstrate to healthcare professionals and patients that our products afford benefits to the patients that are cost-effective as compared to the benefits of alternative therapies.
Our ability to demonstrate this depends on a variety of factors, including:
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the demonstration of efficacy and safety in clinical trials;
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the existence, prevalence, and severity of any side effects;
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the potential or perceived advantages or disadvantages compared to alternative treatments;
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the timing of market entry relative to competitive treatments;
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the pricing relative to competitive products;
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the relative cost, convenience, product dependability and ease of administration;
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the strength of marketing and distribution support;
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the sufficiency of coverage and reimbursement of our product candidates by governmental and other third-party
payors;
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the product labeling or product insert required by the FDA or regulatory authorities in other countries; and
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the potential of patients choosing to use generic products off label.
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Our product revenues will be adversely affected if, due to these or other factors, the products we or our collaborators are able to commercialize do not gain
significant market acceptance.
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We depend upon our proprietary technologies, and we may not be able to protect our potential competitive
proprietary advantage.
Any of our pending or future patent applications may not result in the issuance of patents and any patents issued may be
subjected to further proceedings limiting their scope and may in any event not contain claims broad enough to provide meaningful protection. Any patents that are issued to us or our present and future collaborators may not provide significant
proprietary protection or competitive advantage and may be circumvented or invalidated. In addition, unpatented proprietary rights, including trade secrets
and know-how, can
be difficult to protect
and may lose their value if they are independently developed by a third party or if their secrecy is lost. Further, because development and commercialization of pharmaceutical products can be subject to substantial delays, patents may expire and
provide only a short period of protection, if any, following commercialization of products.
We may infringe on the intellectual property rights of
others, and any litigation could force us to stop selling potential products and could be costly, divert management attention and harm our business.
We must be able to commercialize products without infringing the proprietary rights of other parties. Because the markets in which we operate involve
established competitors with significant patent portfolios, including patents relating to compositions of matter, methods of use and methods of drug delivery, it could be difficult for us or our collaborator Grifols to use our technologies or
commercialize products without infringing the proprietary rights of others. We may not be able to design around the patented technologies or inventions of others, and we may not be able to obtain licenses to use patented technologies on acceptable
terms, or at all. If we cannot operate without infringing on the proprietary rights of others, we will not earn product revenues. For example, we are aware of patents recently issued in the U.S. and assigned to Insmed with claims covering methods of
treatment with quinolone antibiotics, which includes ciprofloxacin, against pulmonary infections. We filed a post-grant review, or PGR, petition in the United States Patent and Trademark Office Patent Trial and Appeal Board, or PTAB, challenging the
validity of the claims of Insmeds U.S. Patent No. 9,402,845 or the 845 Patent. In a PGR, a petitioner may request that the PTAB reconsider the validity of issued patent claims and any patent claim PTAB determines to be unpatentable
is stricken from the challenged patent. In August 2017, Insmed filed a Preliminary Response to our petition. In November 2017, PTAB denied institution of our PGR of the 845 Patent. We are currently assessing the PTABs decision.
If we or our collaborator Grifols are required to defend an infringement lawsuit, we could incur substantial costs, and the lawsuit could divert
managements attention, regardless of the lawsuits merit or outcome. These legal actions could seek damages and seek to enjoin testing, manufacturing, and marketing of the accused product or process. In addition to potential liability for
significant damages, we could be required to obtain a license to continue to manufacture or market the accused product or process and any license required under any such patent may not be made available to us on acceptable terms, if at all, or we
could incur significant expenses in royalty payments to a licensor.
Periodically, we review publicly available information regarding the development
efforts of others in order to determine whether these efforts may violate our proprietary rights. We may determine that litigation is necessary to enforce our proprietary rights against others. Such litigation could result in substantial expense,
regardless of its outcome, and may not be resolved in our favor.
Furthermore, patents already issued to us or our pending patent applications may become
subject to dispute, and any disputes could be resolved against us. In addition, patent applications in the United States are currently maintained in secrecy for a period of time prior to issuance and patent applications in certain other countries
generally are not published until more than 18 months after they are first filed. Publication of discoveries in scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we were the first creator of
inventions covered by our issued patents or pending patent applications or that we were the first to file patent applications on such inventions. For example, we are aware of patents recently issued in the U.S. and assigned to Insmed with claims
covering methods of treatment with quinolone antibiotics, which includes ciprofloxacin, against pulmonary infections.
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If our future clinical trials are delayed for any reason, we would incur additional costs and delay the
potential receipt of revenues.
Before we or any current or future collaborators can file for regulatory approval for the commercial sale of our
potential products, the FDA and EMA will require extensive preclinical safety testing and clinical trials to demonstrate their safety and efficacy. Completing clinical trials in a timely manner depends on many factors. Delays in completing any
future clinical trials may result in increased costs, program delays, or both, and the loss of potential revenues.
If we do not continue to attract
and retain key employees, our product development efforts will be delayed and impaired.
We depend on a small number of key management and
technical personnel. Our success also depends on our ability to attract and retain additional highly qualified management, clinical, regulatory and development personnel. There is a shortage of skilled personnel in our industry, we face competition
in our recruiting activities, and we may not be able to attract or retain qualified personnel. Our former President and Chief Executive Officer, Dr. Igor Gonda, our former Chief Medical Officer, Dr. Juergen Froehlich, and our former Chief
Financial Officer, Nancy Pecota resigned on February 11, 2018. Additionally, Dr. Gonda, Dr. Froehlich and Ms. Pecota were retained by the company as consultants. On May 31, 2018 Dr. Froehlich was rehired as the
Companys Chief Medical Officer. These resignations and losing any of our remaining key employees could impair our product development efforts and otherwise harm our business. Any of our employees may terminate their employment with us at will.
If we market our products in other countries, we will be subject to different laws and regulations, and we may not be able to adapt to those laws
and regulations, which could increase our costs while reducing our revenues.
If we market any approved products in foreign countries, we will be
subject to different laws and regulations, particularly with respect to intellectual property rights and regulatory approval. To maintain a proprietary market position in foreign countries, we may seek to protect some of our proprietary inventions
through foreign counterpart patent applications. Statutory differences in patentable subject matter may limit the protection we can obtain on some of our inventions outside of the United States. The diversity of patent laws may make our expenses
associated with the development and maintenance of intellectual property in foreign jurisdictions more expensive than we anticipate. We will not obtain the same patent protection in every market in which we may otherwise be able to potentially
generate revenues. In addition, in order to market our products in foreign jurisdictions, we and our present and future collaborators must obtain required regulatory approvals from foreign regulatory agencies and comply with extensive regulations
regarding safety and quality. We may not be able to obtain regulatory approvals in such jurisdictions, and we may have to incur significant costs in obtaining or maintaining any foreign regulatory approvals. If approvals to market our products are
delayed, if we fail to receive these approvals, or if we lose previously received approvals, our business would be impaired as we could not earn revenues from sales in those countries.
We may be exposed to product liability claims, which would hurt our reputation, market position, and operating results.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates in humans and will face an even greater risk upon
commercialization of any products. These claims may be made directly by consumers or by pharmaceutical companies or others selling such products. We may be held liable if any product we develop causes injury or is found otherwise unsuitable during
product testing, manufacturing or sale. Regardless of merit or eventual outcome, liability claims would likely result in negative publicity, decreased demand for any products that we may develop, injury to our reputation and suspension or withdrawal
of clinical trials. Any such claim will be very costly to defend and also may result in substantial monetary awards to clinical trial participants or customers, loss of revenues and the inability to commercialize products that we develop. Although
we currently have clinical trials and product liability insurance, we may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in amounts sufficient to protect our business, or at all. A successful claim brought
against us in excess of our insurance coverage would have a material adverse effect on our results of operations.
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If we cannot arrange for adequate third-party reimbursement for our products, our revenues will suffer.
In both domestic and foreign markets, sales of our potential products will depend in substantial part on the availability of adequate
reimbursement from third-party payors such as government health administration authorities, private health insurers, and other organizations. Third-party payors often challenge the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved pharmaceutical products. Any products we are able to develop successfully may be deemed not reimbursable by third-party payors. In addition, our products may not be
considered cost-effective, and adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change before our
products are approved for marketing and any such changes could further limit reimbursement. If any products we develop do not receive adequate reimbursement, our revenues will be severely limited.
Our use of hazardous materials could subject us to liabilities, fines, and sanctions.
Our laboratory and clinical testing sometimes involves the use of hazardous and toxic materials. We are subject to federal, state and local laws and
regulations governing how we use, manufacture, handle, store and dispose of these materials. Although we believe that our safety procedures for handling and disposing of such materials comply in all material respects with all federal, state and
local regulations and standards, there is always the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for any damages that result and such liability could exceed our financial
resources. Compliance with environmental and other laws may be expensive and current, or future regulations may impair our development or commercialization efforts.
If we are unable to effectively implement or maintain a system of internal control over financial reporting, we may not be able to accurately or timely
report our financial results and our stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to
evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on
Form 10-K for
that fiscal year. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Reform Act, became law. The Reform Act includes a provision that indefinitely exempts
companies that qualify as either
a non-accelerated filer
or smaller reporting company from the auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002. For our fiscal
2017 and subsequent foreseeable fiscal years, we expect to be exempt from such requirement. However, our ability to comply with the annual internal control report requirements will depend on the effectiveness of our financial reporting and data
systems and controls across our company. We expect these systems and controls to involve significant expenditures and to become increasingly complex as our business grows. To effectively manage this complexity, we will need to continue to improve
our operational, financial and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our
operating results and cause us to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to
suffer.
We store sensitive data, including intellectual property, our proprietary business information and personally identifiable information of
our employees, on our network servers, located in our data centers. The secure maintenance of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks
by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or
other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, damage our reputation and adversely impact our operating results. Numerous United
States federal and state laws and regulations and foreign laws and regulations, including data breach notification laws, health information privacy laws, and federal and consumer protection laws, govern the collection, use, and disclosure of
health-related and other personal information. In addition, we may obtain health information from third parties (e.g., healthcare providers who prescribe our products) that are subject to privacy and security requirements under
HIPAA.
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Our business and operations would suffer in the event of system failures.
Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from
computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such an event could cause interruption of our operations. For example, the loss of data from completed or ongoing clinical trials
for our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs. To the extent that any disruption or security breach were to result in a loss of or damage to our data, or inappropriate
disclosure of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed.
Risks
Related to Our Common Stock
Our stock price is likely to remain volatile.
The market prices for securities of many companies in the drug delivery and pharmaceutical industries, including ours, have historically been highly volatile,
and the market from time to time has experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
The market prices for our common stock may also be influenced by many factors, including:
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the limited trading volume for shares of our common stock and the fact that a large percentage of our outstanding
shares are held by a small number of shareholders;
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announcements of clinical trial results, technological innovations or new commercial products by our competitors
or us;
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developments or disputes concerning patents or proprietary rights;
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delays in the development or approval of our product candidates;
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regulatory developments in both the United States and foreign countries;
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sales of our stock by certain large institutional shareholders;
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research analyst recommendations and our ability to meet or exceed quarterly performance expectations of analysts
or investors;
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fluctuations in our operating results;
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failure to maintain or establish collaborative relationships;
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publicity regarding actual or potential developments relating to products under development by our competitors or
us;
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investor perception of us;
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concern of the public or the medical community as to the safety or efficacy of our products, or products deemed
to have similar safety risk factors or other similar characteristics to our products;
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future sales or expected sales of substantial amounts of common stock by shareholders;
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our ability to raise capital; and
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economic and other external factors.
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In the past, class action securities litigation has often been instituted against companies promptly following volatility in the market price of their
securities, and a class action securities suit was instituted against us in the first quarter of 2018 as a result of the decline in the market price of our common stock (this suit was subsequently dismissed by the court in the second quarter of 2018
with prejudice to the lead plaintiff and without prejudice to other putative class members). Any such litigation against us may, regardless of its merit, result in substantial costs and a diversion of managements attention and resources.
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Nasdaq has notified us that we are no longer in compliance with Nasdaqs continued listing
requirements. If we fail to regain compliance, we will be subject to delisting by Nasdaq. If we are delisted, our stock price may decline and the liquidity of our securities and our ability to raise capital could be significantly impaired.
Our common stock is listed on the Nasdaq Capital Market, or Nasdaq. In order to maintain that listing, we must sustain a minimum market value of
listed securities of $35 million or shareholders equity of at least $2.5 million, among other requirements for continued listing. On March 7, 2018 we received a notice from Nasdaq that we were not in compliance with
Nasdaqs Listing Rule 5550(b)(1)-(3), as we had not, among other things, maintained a minimum market value of listed securities of $35 million. The notification of noncompliance had no immediate effect on the listing or trading of the
Companys common stock on Nasdaq under the symbol ARDM. Pursuant to the Nasdaq Listing Rules, we had 180 days, or until September 4, 2018, to regain compliance with the Nasdaq Listing Rules. On September 5, 2018, we
received a notice from Nasdaq stating that the Company has not regained compliance with Nasdaq Listing Rule 5550(b)(2) and that the Companys securities will be delisted from Nasdaq. We have appealed this determination and our appeal hearing
before a Nasdaq Hearings Panel was held on November 8, 2018.
At our hearing with the Nasdaq Hearings Panel, we undertook to comply with certain
conditions, including our completion of this offering, prior to February 15, 2019, in order to maintain our listing on the Nasdaq Capital Market. The Nasdaq Hearings Panel has not yet provided any formal guidance regarding our continued listing
on the Nasdaq Capital Market and we cannot assure you that we will be successful in regaining compliance with Nasdaq continued listing requirements or that we will be able to meet, and maintain compliance with, Nasdaq listing standards going
forward.
If our stock is delisted from Nasdaq, this may result in a decline in our stock price and would likely impair the liquidity of our securities
not only in the number of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and the potential reduction in media coverage. As a result,
an investor may find it significantly more difficult to dispose of our common stock, and our ability to raise future capital through the sale of the shares of our common stock or other securities convertible into or exercisable for our common stock
could be materially limited. If we are delisted from Nasdaq, trading in our shares of common stock may be conducted, if available, on the OTC Bulletin Board Service or, if available, via another market.
We have implemented certain anti-takeover provisions, which may make an acquisition less likely or might result in costly litigation or proxy battles.
Certain provisions of our articles of incorporation and the California Corporations Code could discourage a party from acquiring, or make it more
difficult for a party to acquire, control of our company without the approval of our Board of Directors. These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain
provisions allow our Board of Directors to authorize the issuance, without shareholder approval, of preferred stock with rights superior to those of the common stock. We are also subject to the provisions of Section 1203 of the California
Corporations Code, which requires us to provide a fairness opinion to our shareholders in connection with their consideration of any proposed interested party reorganization transaction.
We have adopted an executive officer severance plan (which was temporarily suspended in the first quarter of 2018) and entered into change of control
agreements with our executive officers, both of which may provide for the payment of benefits to our officers and other key employees in connection with an acquisition. The provisions of our articles of incorporation, our severance plan and our
change of control agreements, and provisions of the California Corporations Code may discourage, delay or prevent another party from acquiring us or reduce the price that a buyer is willing to pay for our common stock.
One or more of our shareholders may choose to pursue a lawsuit or engage in a proxy battle with management to limit our use of one or more of these
anti-takeover protections. Any such lawsuit or proxy battle would, regardless of its merit or outcome, result in substantial costs and a diversion of managements attention and resources.
We have never paid dividends on our capital stock.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the
development and growth of our business. Therefore, our shareholders may not receive any funds absent a sale of their shares and, capital appreciation, if any, of our common stock will be our shareholders sole source of gain for the foreseeable
future. We cannot assure shareholders of a positive return on their investment if they sell their shares, nor can we assure that shareholders will not lose the entire amount of their investment.
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Disputes may arise between Grifols and us that may be resolved in a manner unfavorable to our other
shareholders and us.
In August 2013, we entered into several agreements with Grifols as part of the completion of a private sale of shares of
common stock to Grifols, including, in particular the License and Collaboration Agreement, the Governance Agreement, and a registration rights agreement with respect to shares of common stock owned by Grifols. As a result of the various obligations
under these agreements, in addition to Grifols beneficial ownership of approximately 48% of our common stock (inclusive of shares of our common stock issuable to Grifols upon conversion of its Convertible Notes), conflicts of interest may
arise between Grifols and us from time to time. Disagreements regarding the rights and obligation of Grifols under these agreements could create conflicts of interest for one of our directors, who has been designated by Grifols and subsequently
nominated by us for election to our Board. Any such disagreements could also lead to actual disputes or legal proceedings that may be resolved in a manner unfavorable to our other shareholders and us. In addition, Grifols has a number of consent
rights under the Governance Agreement and certain preemptive rights to participate in any future issuances of common stock (or common stock equivalents) by us or to acquire shares in the open market to maintain ownership thresholds specified in the
Governance Agreement. Grifols may exercise any of these rights, or any of its other rights contained in its agreements with us, in a manner which is not necessarily in the best interest of us or our other shareholders. The result of any of these
conflicts could adversely affect our business, financial condition, results of operations or the price of our common stock.
Our principal
shareholders own a large percentage of our common stock and will be able to exert significant control over matters submitted to our shareholders for approval, including delaying or preventing a change in control of our company.
A small number of our shareholders own a large percentage of our common stock and can, therefore, influence the outcome of matters submitted to our
shareholders for approval. Based on information known to us, our two largest shareholders, collectively, beneficially own approximately 75% of the class of our common stock as of September 30, 2018. These two shareholders purchased all of the
Convertible Notes and related Warrants described in Note 6 to the condensed consolidated financial statements included in our Quarterly Report on Form
10-Q
for the quarterly period ended September 30,
2018, leading to a corresponding increase in their respective ownership on a fully-diluted basis. As a result, these shareholders have the ability to influence the outcome of matters submitted to our shareholders for approval, including certain
proposed amendments to our amended and restated articles of incorporation (for example, amendments to increase the number of our authorized shares) and any other material transactions we may undertake in the future, such as a financing transaction
or a merger, consolidation or sale of all or substantially all of our assets. These shareholders may support proposals and actions with which you may disagree. The concentration of ownership could delay or prevent a change in control of our company
or otherwise discourage a potential acquirer from attempting to obtain control of our company, which in turn could reduce the price of our common stock.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following includes a summary of transactions since January 1, 2015 in which we have been a participant, or any proposed transaction, in which the
amount involved in the transaction exceeded the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years and in which any of our directors, executive officers or, to our knowledge,
beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change of
control and other arrangements, which are described under Executive Compensation in our Annual Report on Form
10-K
(which incorporates such information by reference from the section captioned
Compensation in our definitive proxy statement filed on May 15, 2018), which report is incorporated by reference in this prospectus.
Collaboration with Grifols
We are party to the License
Agreement with Grifols, which is the beneficial owner of approximately 48% of the Companys common stock, under which we licensed to Grifols the Licensed Products on an exclusive, world-wide basis. For more information on the License Agreement,
see SummaryAradigm Overview.
Under the License Agreement, Grifols funded $65 million for certain development expenses (which
includes allocations for our internal, fully-burdened expenses). During the years ended December 31, 2017, December 31, 2016 and December 31, 2015, we recognized approximately $14 million, $40,000 and $23 million,
respectively, in contract revenue relating to services performed and costs incurred during the period under the License Agreement. We have utilized the full amount of the $65 million of Grifols-funded budget provided under the License Agreement
and will not be recognizing any future revenue related to the $65 million Grifols-funded budget.
We are also party to a registration rights
agreement with Grifols and a governance agreement with Grifols, or the Governance Agreement, which, among other things, grants certain rights to Grifols to maintain a target level of ownership in our company and certain preemptive rights to
participate in future issuances of our capital stock. For more information on each of these agreements, see Description of SecuritiesCommon Stock.
9.0% Convertible Senior Notes due 2021
On April 21,
2016, we entered into a securities purchase agreement with various purchasers, including two entities who are beneficial owners of more than 5% of our common stock (Grifols and First Eagle), in connection with the private placement of
$23 million in aggregate principal amount of Convertible Notes to an indenture of the same date with the same purchasers and associated warrants, or the 2016 Private Placement. On May 1, 2018 and November 1, 2018, we issued additional
Convertible Notes in the aggregate principal amount of $1,035,000 and $1,079,325, respectively. These Convertible Notes were issued to capitalize accrued but unpaid interest payable on the previously-issued Convertible Notes.
The Convertible Notes are senior unsecured and unsubordinated obligations; rank equal in right of payment to our existing and future unsecured indebtedness
that is not subordinated and are effectively subordinated in right of payment to our existing and future secured indebtedness. On or after December 1, 2017, we may redeem for cash all or a portion of the Convertible Notes if the last reported
sale price of our common stock is at any time equal to or greater than 200% of the conversion price then in effect for at least twenty trading days immediately preceding the date on which we provide notice of redemption, at a redemption price equal
to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. The indenture pursuant to which the Convertible Notes were issued provides for customary events of default, which
may result in the acceleration of the maturity of the Convertible Notes, including, but not limited to, cross acceleration to certain other indebtedness of ours and our subsidiaries. In the case of an event of default arising from specified events
of bankruptcy or insolvency or reorganization, all outstanding Convertible Notes will become due and payable immediately without further action or notice. If any other event of default under the indenture occurs or is continuing, the trustee or
holders of at least 25% in the aggregate principal amount of the then outstanding Convertible Notes may declare all the Convertible Notes to be due and payable immediately.
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The warrants have a five-year term and are exercisable at $5.21 per share of common stock. The exercise price is
subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events or upon any distributions of assets, including cash, stock or other property to our shareholders.
Grifols and First Eagle acquired an aggregate principal amount of $19,950,000 and $3,000,000 of Convertible Notes, respectively. No principal payments
have been made, interest payments in the amounts of $2,723,175 and $350,250 have been made to Grifols and First Eagle, respectively, and accrued and unpaid interest amounts of $1,835,899 and $276,074 owed to each of Grifols and First Eagle,
respectively, have been capitalized by adding such amount to the principal balance of Convertible Notes held by each of Grifols and First Eagle. In addition, First Eagle also purchased warrants exercisable for 259,117 shares of our common stock in
the 2016 Private Placement at an exercise price of $5.21 per share of common stock.
9.0% Senior Promissory Notes due 2021
On April 13, 2018, we entered into a note purchase agreement between us and certain institutional lenders, including entities affiliated with Grifols and
First Eagle, two entities who are beneficial owners of more than 5% of our common stock, whereby such lenders agreed to purchase up to approximately $7 million aggregate principal amount of our Notes. We completed the first closing under the
note purchase agreement on April 13, 2018, at which time we issued and sold approximately $2 million aggregate principal amount of Notes to the lenders thereunder. We completed subsequent closings under the note purchase agreement on
May 14, 2018, June 13, 2018, July 13, 2018, August 13, 2018 and September 12, 2018 pursuant to which we sold, at each such subsequent closing, Notes in the aggregate principal amount of approximately $1 million to
certain of the lenders under the note purchase agreement.
On October 25, 2018, we entered into a senior note purchase agreement whereby Grifols
agreed to purchase up to $4 million aggregate principal amount of our 9.0% Senior Promissory Notes due 2021, or the October 2018 Notes. We refer to the sale and issuance of the October 2018 Notes as the October 2018 Private Placement. We
completed the first closing under the senior note purchase agreement on October 25, 2018, at which time we issued and sold $2 million aggregate principal amount of October 2018 Notes to Grifols. Subject to the satisfaction or waiver of the
conditions of the closing set forth in the senior note purchase agreement, we anticipate the sale of the remaining approximately $2 million of the October 2018 Notes to occur in one subsequent closing, which is anticipated to occur prior to
December 31, 2018.
The Notes are senior unsecured obligations of ours and bear interest at a fixed rate of 9.0% per annum, payable semiannually in
arrears on May 1 and November 1 of each year, beginning on May 1, 2018 in the case of Notes issued on April 13, 2018 and on November 1, 2018 in the case of Notes issued thereafter, unless earlier redeemed or cancelled in
accordance with the terms of the Notes. The Notes rank (i) senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes, (ii) equal in right of payment to any of our indebtedness
that is not so subordinated, including the Convertible Notes (iii) effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and (iv) structurally junior
to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
We may, at our option, redeem for cash all or any portion of
the outstanding Notes (or a pro rata basis) at any time in whole and, from time to time, in part. There is no sinking fund provided for the Notes. The redemption price for the Notes will equal 100% of the aggregate principal amount being redeemed
plus accrued and unpaid interest to, but excluding, any redemption date.
The October 2018 Notes are senior unsecured obligations of ours and bear
interest at a fixed rate of 9.0% per annum, payable semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2018, in the case of October 2018 Notes issued on October 25, 2018, and on May 1,
2019, in the case of October 2018 Notes issued thereafter, unless earlier redeemed or cancelled in accordance with the terms of the October 2018 Notes. The October 2018 Notes are our senior unsecured obligations and rank (i) senior in right of
payment to any of our indebtedness that is expressly subordinated in right of payment to the October 2018 Notes, (ii) equal in right of payment to any of our indebtedness that is not so subordinated, including the Convertible Notes and the
Notes (iii) effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and (iv) structurally junior to all indebtedness and other liabilities (including
trade payables) of our subsidiaries.
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We may, at our option, redeem for cash all or any portion of the outstanding October 2018 Notes (on a pro rata
basis) at any time in whole or from time to time in part. There is no sinking fund provided for the October 2018 Notes. The redemption price for the October 2018 Notes will equal 100% of the aggregate principal amount being redeemed plus accrued and
unpaid interest to, but excluding, the redemption date.
Grifols and First Eagle acquired an aggregate principal amount of $5,950,000 and $1,050,000 of
Notes, respectively. No principal payments have been made and accrued and unpaid interest amounts of $181,426 and $51,925 owed to each of Grifols and First Eagle, respectively, have been capitalized by adding such amount to the principal balance of
Notes held by each of Grifols and First Eagle.
Grifols acquired an aggregate principal amount of $2 million of October 2018 Notes and no principal
payments have been made on the October 2018 Notes. We have elected to accrue all interest due on the October 2018 Notes and no principal payments have been made.
Other Transactions
In 2016 we engaged the law firm Hogan
Lovells US LLP, or Hogan Lovells, to provide legal services to the Company. An immediate family member of Virgil Thompson, one of our directors and our former Chairman, previously served as a partner at Hogan Lovells. We incurred $605,400 and
$752,000 for services performed by Hogan Lovells during the years ended December 31, 2016 and 2017, respectively. For January 1, 2018 through November 1, 2018, we have incurred approximately $564,000 for services performed by Hogan
Lovells.