Overview
We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum (“CCH”) for multiple indications. We maintain intellectual property with respect to injectable CCH
that treats, among other indications, Dupuytren’s contracture (“DC”), Peyronie’s disease (“PD”), frozen shoulder syndrome, and uterine fibroids. Injectable CCH currently is approved and marketed in the U.S. under the trademark XIAFLEX® for the
treatment of both DC and PD. We generate revenue primarily from our license agreement with Endo, under which we receive license, sublicense income, royalties, milestones and mark-up on cost of goods sold payments related to the sale, regulatory
submissions and approval of XIAFLEX®.
We have developed injectable CCH for 12 clinical indications to date. We currently are evaluating CCH as a treatment for uterine fibroids. Under our license agreement with Endo, Endo has the right to further develop
CCH for frozen shoulder and plantar fibromatosis, as well as certain other licensed indications. Endo has a right to opt-in for use of CCH in the treatment of uterine fibroids.
Collagenase
Collagenase is the only protease that can hydrolyze the triple helical region of collagen under physiological conditions. The specific substrate collagen comprises approximately one-third of the total protein in
mammalian organisms, and it is the main constituent of skin, tendon, and cartilage, as well as the organic component of teeth and bone. The body relies on endogenous collagenase production to remove dead tissue, and collagenase production is an
essential biological mechanism, which regulates matrix remodeling and the normal turnover of tissue. The CCH developed by us has a broad specificity towards all types of collagen and, we believe is more efficient than mammalian collagenases. CCH
cleaves the collagen molecule at multiple sites along the triple helix whereas the mammalian collagenase is only able to cleave the molecule at a single site along the triple helix.
Collagenase is widely used for cell dispersion for tissue disassociation and cell culture because it does not damage the cell membrane. Since the main component of scar tissue is collagen, collagenase has been used
in a variety of clinical investigations to remove scar tissue without surgery.
License Agreement with Endo
On August 31, 2011, we entered into the Second Amended and Restated Development and License Agreement (as amended, the “License Agreement”) with Auxilium Pharmaceuticals, Inc. (“Auxilium”), an entity that was
acquired by Endo in 2015. The License Agreement originally was entered into in June 2004 to obtain exclusive worldwide rights to develop, market, and sell certain products containing our enzyme CCH, which Endo markets for approved indications under
the trademark XIAFLEX®. Endo’s licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration. Currently, Endo’s licensed rights cover the indications of DC, PD, frozen
shoulder, plantar fibromatosis, and other potential indications. We and Endo may further expand the License Agreement to cover other indications as they are developed.
On February 26, 2019, we entered into the Second Amendment to the Second Amended and Restated Development and License Agreement (the “Second Amendment”) (effective as of January 1, 2019) to amend certain provisions
of the License Agreement to, among other things, require Endo to provide timely estimates of royalties to assist us in complying with our financial reporting obligations. Pursuant to the terms of the Second Amendment, we have consented to the
assignment of the License Agreement by Endo Global Ventures to Endo Global Aesthetics Limited, an Irish private company and an affiliate of Endo Global Ventures that is indirectly wholly-owned by Endo.
Under the License Agreement, Endo is responsible, at its own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. Endo has the
option to license development and marketing rights to these indications based on a full analysis of the data from the clinical trials, which would transfer responsibility for the future development costs to Endo and trigger opt-in payments and
potential future milestone and royalty payments to us.
The License Agreement extends, on a country-by-country and product-by-product basis, for the longer of the patent life, the expiration of any regulatory exclusivity period or twelve years from the effective date.
Either party may terminate the License Agreement as a result of the other party’s breach or bankruptcy.
Endo must pay us on a country-by-country and product-by-product basis a specified percentage, which typically is in the low double digits, of net sales for products covered by the License Agreement. This royalty
applies to net sales by Endo or its sublicensees. Endo also is obligated to pay a percentage of any future regulatory or commercial milestone payments received from such sublicensees. In addition, Endo and its affiliates pay us an amount equal to a
specified mark-up on certain cost of goods related to supply of XIAFLEX® (which mark-up is capped at a specified percentage of the cost of goods of XIAFLEX®) for products sold by Endo and its affiliates.
Pursuant to the License Agreement, Endo is selling XIAFLEX® in the U.S. for the treatment of DC and PD and is distributing XIAFLEX® in Canada through its operating company, Paladin Labs, Inc. In early 2020, Endo
announced that it initiated XIAFLEX® development programs for the treatment of plantar fibromatosis and adhesive capsulitis. Endo had previously collaborated with partners to commercialize XIAFLEX® and Xiapex® outside of the United States and
Canada. Endo is in the process of terminating third party partnership agreements for markets outside of the United States, which will reduce the amount of royalty revenues received by us. We do not believe that this reduction will have a material
effect on our future consolidated statements of operations.
Operational Highlights
Endo-Marketed Indications
Dupuytren’s Contracture.
CCH is currently approved and marketed in the U.S. under the trademark XIAFLEX® for the treatment of DC. XIAFLEX® is indicated for the treatment of adult patients with DC with
an abnormal buildup of collagen in the hands, which limits or disables hand function.
DC is a deforming condition of the hand in which one or more fingers contract toward the palm, often resulting in physical disability. The onset of DC is characterized by the formation of nodules in the palm that are
composed primarily of collagen. As the disease progresses, the collagen nodules begin to form a cord causing the patient’s finger(s) to contract, making it impossible to open the hand fully. Patients often complain about the inability to wash their
hands, wear gloves, or grasp some objects. DC is a genetic condition that is more common in men than in women, and increases in incidence with age.
XIAFLEX® is the only drug approved by the FDA for the treatment of DC. Prior to FDA approval of XIAFLEX®, the only proven treatment for DC was surgery.
Peyronie’s Disease.
XIAFLEX® is currently approved in the U.S. for the treatment of PD.
PD is characterized by the presence of a collagen plaque on the shaft of the penis, which can distort an erection and make intercourse difficult or impossible in advanced cases. In some mild cases, the plaque can
resolve spontaneously without medical intervention. In severe cases, the penis can be bent at a 90-degree angle during erection. Significant psychological distress has been noted in patients with PD who are sexually active. Frequent patient
complaints include increased pain, painful erections, palpable plaque, penile deformity, and erectile dysfunction. Patients with PD have been reported to have an increased likelihood of having DC, frozen shoulder, plantar fibromatosis, knuckle
pads, hypertension and diabetes. PD is a disease with an initial inflammatory component. This inflammatory phase is poorly understood with a somewhat variable disease course and spontaneous resolution occurring in certain cases. After approximately
12 months of disease, the disease is reported to often develop into a more chronic, stable phase. PD is believed to be underdiagnosed and undertreated.
In December 2013, the FDA approved the supplemental biologics license application (“sBLA”) submitted by Auxilium for XIAFLEX®. This is the first and only FDA-approved biologic therapy indicated for the treatment of
PD in men with a palpable plaque and a curvature of 30 degrees or greater at the start of therapy.
Indications that Endo has Under Development
Cellulite (Edematous Fibrosclerotic Panniculopathy).
Edematous fibrosclerotic panniculopathy, commonly known as cellulite, describes a condition in which lobules of subcutaneous adipose tissue extend into the dermal layer. Cellulite can involve the loss of elasticity
or shrinking of collagen cords, called septae, that attach the skin to lower layers of muscle. When fat in cellulite prone areas swells and expands, the septae tether the skin, which causes surface dimpling characteristic of cellulite. These
changes can visibly affect the shape of the epidermis and resemble an orange peel-like dimpling of the skin.
Cellulite has been reported to occur in 85-98% of post-pubertal females and rarely in men, and it is believed to be prevalent in women of all races. Current treatments for cellulite include massage devices, creams,
unapproved injectables, laser-based procedures or liposuction. There are no drugs currently approved by the FDA to treat cellulite, and devices cleared by the FDA to treat the condition have varying degrees of success in eliminating cellulite.
Cellfina and Cellulaze, the devices of two competitors in the cellulite market, have already received medical device approval. Treatment with XIAFLEX® is intended to target and lyse, or break, those collagen tethers with the goal of releasing the
skin dimpling and potentially resulting in smoothing of the skin.
Endo’s license rights relating to CCH also permit Endo to develop product candidates containing CCH for certain medical aesthetics indications. For example, Endo has global marketing rights for CCH for the treatment
of cellulite.
In September 2019, Endo submitted a BLA to the FDA for CCH for the treatment of cellulite in the buttocks. In November 2019, Endo announced the FDA’s acceptance for review of the original BLA for CCH for the
treatment of cellulite in the buttocks. The BLA is supported by the results from RELEASE-1 and RELEASE-2 Phase 3 clinical trials, as well as a clinical program. Trial subjects receiving CCH showed highly statistically significant levels of
improvement in the appearance of cellulite with treatment, as measured by the trials’ primary endpoint. In addition, the RELEASE-1 trial passed eight out of eight key secondary endpoints and the RELEASE-2 trial passed seven out of eight key
secondary endpoints. Finally, CCH was well-tolerated in the actively-treated subjects with most adverse events being mild to moderate in severity and primarily limited to the local injection area.
According to Endo, the Prescription Drug User Fee Act target action date for this application has been set for July 6, 2020.
Frozen Shoulder (Adhesive Capsulitis).
Frozen shoulder syndrome, of adhesive capsulitis, is a clinical syndrome of pain and decreased motion in the shoulder joint which results from inflammation and thickening of the shoulder capsule due to collagen. It
is estimated to affect 20 to 50 million people worldwide with a slightly higher incidence in women. It is estimated that 300,000 cases of frozen shoulder syndrome are diagnosed annually in the U.S. It typically occurs in adults between the ages of
40-70. It is estimated that 20% of diabetics have frozen shoulder syndrome. No FDA-approved pharmaceutical therapies are currently available for the treatment of frozen shoulder. The most common treatments for frozen shoulder syndrome are
longer-term extensive physical therapy, manipulation under anesthesia, corticosteroids and/or arthroscopy, and some drugs are used to manage pain.
On March 12, 2015, Endo provided an update on the results of the Phase 2b study without releasing all of the data. Endo noted strong drug effect and similar XIAFLEX® patient improvements in flexion, shoulder
abduction and external and internal rotation seen across both Phase 2a and 2b trials and similar patient improvement in pain seen across both trials. Endo also noted an increased and unexpectedly robust placebo effect in those patients who did not
receive XIAFLEX®. In early 2020, Endo announced that it initiated development programs of XIAFLEX® for the treatment of adhesive capsulitis.
Plantar Fibromatosis.
Plantar fibromatosis, or Ledderhose disease, is a medical condition characterized by pain and disability caused by the thickening of the feet’s deep connective tissue resulting in the formation of nodules or cords
along the tendons of the foot. Patients with plantar fibromatosis often have DC and frozen shoulder. It is estimated that there are approximately 200,000 patients in the U.S. Treatment may include orthotics and anti-inflammatory drugs in the early
stages of the disease, steroid injections and surgery in advanced cases. There are no pharmaceutical products that are FDA approved for use in this indication in the U.S. In November 2015, with our consent, Endo exercised an early opt-in for
XIAFLEX® for this potential indication. Endo is responsible for further development of this indication. In early 2020, Endo announced that it initiated development programs of XIAFLEX® for the treatment of plantar fibromatosis. Other Indications
Uterine Fibroids.
Uterine fibroids are benign tumors that form on the wall of the uterus that contain large amounts of collagen and are associated with significant co-morbidities, which can include pain, decreased fertility, pregnancy
complications, miscarriage, heavy menstrual bleeding and frequent urination. Uterine fibroids are the primary indication for hysterectomy in the U.S. Approximately 200,000 hysterectomies and 30,000 myomectomies are performed annually to treat
fibroids. Uterine fibroids have been estimated to result in direct costs of $9.4 billion annually in the U.S., including costs for surgery, hospital admissions, outpatient visits and medications.
In October 2014, we published data showing that highly purified collagenase can reduce the rigidity of human uterine fibroid tissue and potentially shrink uterine fibroid tumors by interrupting the accumulation of
poorly aligned and altered collagen. In May 2016, we announced that an article titled, “Loss of Stiffness in Collagen-Rich Uterine Fibroids after Digestion with Purified Collagenase Clostridium Histolyticum” was published in the May 2016 issue of
American Journal of Obstetrics & Gynecology. The ex-vivo study, led by Dr. Phyllis Leppert, showed reduction in stiffness and demonstrated the potential benefits of XIAFLEX® as a non-surgical treatment for uterine fibroid patients.
On April 18, 2017, we announced that we had initiated an open-label, dose escalation Phase 1 clinical trial of XIAFLEX® for the treatment of uterine fibroids. The study, conducted at the Department of Gynecology
& Obstetrics at Johns Hopkins University, consisted of 15 female subjects treated prior to hysterectomy. The primary endpoint of the study assessed the safety and tolerability of a single injection of XIAFLEX® directly into the uterine fibroids
under transvaginal ultrasound guidance. The secondary endpoints assessed symptoms of pain and bleeding, quality of life throughout the study, shrinkage of XIAFLEX® treated fibroids in size, increased rates of apoptosis in treated fibroids and a
decrease in the collagen content of the treated fibroids.
On October 31, 2018, we announced positive topline data from our Phase 1 trial of CCH for the treatment of uterine fibroids. The study met the primary endpoint of safety and tolerability of a single injection of
XIAFLEX® directly into the uterine fibroids under transvaginal ultrasound guidance with no observed clinically significant adverse reactions.
We are currently analyzing the full Phase 1 data to guide the design of potential future studies of CCH for the treatment of uterine fibroids.
LICENSING AND MARKETING AGREEMENTS
License Agreement with Endo
On August 31, 2011, we entered into License Agreement, as summarized above.
On February 1, 2016, we entered into the First Amendment (the “First Amendment”) to the License Agreement. Pursuant to the First Amendment, the Company and Endo Global Ventures mutually agreed that in exchange for a
$8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided, however, that Endo will still be required to pay a mark-up on cost
of goods sold for sales made in the “Endo Territory,” which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees. We received this $8.25 million lump sum
payment in February 2016 and began recognizing this income over time based on sales by non-affiliated sublicensees of Endo outside of the U.S. according to our revenue recognition policy in the second quarter of 2016.
Additionally, we agreed that Endo may opt-in early to indications, prior to our submission of a clinical trial report, with our consent, such consent not to be unreasonably withheld. For early opt-ins, Endo will be
required to make an opt-in payment of $0.5 million on a per indication basis. For regular opt-ins, following our submission of a clinical trial report, Endo will be required to make an opt-in payment of $0.75 million on a per indication basis. Endo
has opted-in to the following indications: frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma.
Pursuant to the License Agreement, we are entitled to receive certain up-front licensing and sublicensing fees, and milestone, mark-up on cost of goods sold and royalty payments. Through December 31, 2019, Endo has
collectively paid us up-front licensing and sublicensing fees and milestone, mark-up on cost of goods sold and royalty payments under the License Agreement of $196.6 million, including fees relating to Endo’s
sublicensee agreements with Swedish Orphan Biovitrum AB (“Sobi”), Asahi Kasei Pharma Corporation (“Asahi”) and Actelion Pharmaceuticals Ltd. (“Actelion”). Additionally, Endo is obligated to make contingent milestone payments to us, with respect to
each of frozen shoulder, cellulite and canine lipoma, lateral hip fat, plantar fibromatosis indications and human lipoma, upon the acceptance of the regulatory filing and upon receipt by Endo, its affiliate or sublicensee of regulatory approval.
The remaining contingent milestone payments that may be received, in the aggregate, from Endo in respect of frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma are $6.0 million.
Endo partnered with Sobi, Asahi and Actelion to commercialize XIAFLEX® and Xiapex® outside of the United States. Sobi had exclusive rights to commercialize Xiapex® for DC and PD, subject to applicable regulatory
approvals, in 28 EU member countries, Switzerland, Norway, Iceland, 18 Central Eastern Europe/Commonwealth of Independent countries, including Russia and Turkey, and 22 Middle Eastern & North African countries. Sobi, via its Partner Products
business unit, was primarily responsible for the applicable regulatory, and commercialization activities for Xiapex® in DC and PD in these countries. Endo granted to Asahi the exclusive right to develop and commercialize XIAFLEX® for the treatment
of DC and PD in Japan. Actelion had marketing and commercial rights for XIAFLEX® in Australia and New Zealand. Endo is in the process of terminating third party partnership agreements for markets outside of the United States, which will reduce the
amount of royalty revenues received by us. We do not believe that this reduction will have a material effect on our future consolidated statements of operations.
To the extent Endo enters into an agreement or agreements related to DC and PD in other territories, the percentage of sublicense income that Endo would pay us will depend on the territory, the stage of development
and approval of XIAFLEX® for the particular indication at the time such other agreement or agreements are executed. Pursuant to the First Amendment, the Company no longer receives a mark-up on cost of goods sold for sales made by Endo outside of
the U.S. to unaffiliated parties; provided, however, that if the sale is made outside of the U.S. by Endo directly, Endo is still required to pay us a mark-up on cost of goods sold.
Endo is required to pay on a country-by-country and product-by-product basis a low double digit royalty as a percentage of net sales for products covered by the License Agreement and sold in the United States,
Europe, Canada, and certain Eurasian countries and Japan. In the case of products covered by the License Agreement and sold in other countries, or the Rest of the World (as defined in the License Agreement), Endo must pay us on a country-by-country
and product-by-product basis a specified percentage of the royalties it is entitled to receive from a partner or partners with whom it has contracted for such countries. The royalty rate is independent of sales volume and clinical indication in the
United States, Europe, Canada, Australia and certain Eurasian countries and Japan, but is subject to set-off in those other countries and the Rest of the World for certain expenses we owe to Endo relating to certain development and patent costs. In
addition, the royalty percentage may be reduced if (i) market share of a competing product exceeds a specified threshold; or (ii) Endo is required to obtain a license from a third party in order to practice our patents without infringing such third
party’s patent rights. To date, neither Auxilium nor Endo has paid any royalties to third parties. In addition, if Endo out-licenses to a third party, then we will receive a specified percentage of certain payments made to Endo in consideration of
such out-licenses.
Endo’s royalty obligations extend for the longer of the patent life (including pending patents) or the expiration of any regulatory exclusivity period based on orphan drug designation or foreign equivalent thereof.
Endo may terminate the License Agreement upon 90 days’ prior written notice. If Endo terminates the License Agreement other than because of an uncured, material breach by us, all rights revert to us. Pursuant to our August 31, 2011 settlement
agreement with Auxilium, we are now co-owners of U.S. Patent No. 7,811,560 and any continuations and divisionals thereof. We expect that this patent will expire in July 2028.
On top of the payments set forth above, as a result of the First Amendment, Endo must pay to us an amount equal to a specified mark-up of the cost of goods sold for products sold in the Endo Territory (as defined in
the License Agreement), which will always include sales made in the United States and sales made in any other country where Endo Global Ventures sells the product directly or through affiliated sublicensees.
Endo is generally responsible, at its own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. Endo is generally responsible for all
clinical development and regulatory costs for PD, DC, frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis, human lipoma and all additional indications for which it exercises its options.
In-Licensing and Royalty Agreements
We have entered into several in-licensing and royalty agreements with various investigators, universities and other entities throughout the years. Royalty obligations under these agreements are our responsibility. It
is the policy of the Company not to announce publicly royalty rates for potential future indications under development before commercialization. It is important to emphasize that in-licensing royalty rates vary from indication to indication and it
should not be assumed that the in-licensing royalty rates for potential future indications will be the same as those for currently marketed indications.
Dupuytren’s Disease
On November 21, 2006, we entered into a license agreement (the “Dupuytren’s License Agreement”), with the Research Foundation of the State University of New York at Stony Brook (the “Research Foundation”), pursuant
to which the Research Foundation granted to us and our affiliates an exclusive worldwide license, with the right to sublicense to certain third parties, the know-how owned by the Research Foundation related to the development, manufacture, use or
sale of (i) the collagenase enzyme obtained by a fermentation and purification process (the “Enzyme”), and (ii) all pharmaceutical products containing CCH or injectable collagenase, in each case to the extent it pertains to the treatment and
prevention of Dupuytren’s disease.
In consideration of the license granted under the Dupuytren’s License Agreement, we agreed to pay to the Research Foundation certain royalties on net sales (if any) of pharmaceutical products containing CCH or
injectable collagenase for the treatment and prevention of Dupuytren’s disease (each a “Dupuytren’s Licensed Product”).
Our obligation to pay royalties to the Research Foundation with respect to sales by us, our affiliates or any sublicensee of any Dupuytren’s Licensed Product in any country (including the U.S.) arises only upon the
first commercial sale of such Dupuytren’s Licensed Product on a country-by-country basis. The royalty rate is 0.5% of net sales. Our obligation to pay royalties to the Research Foundation will continue until the later of (i) the expiration of the
last valid claim of a patent pertaining to the Dupuytren’s Licensed Product; or (ii) the expiration of the regulatory exclusivity period conveyed by the FDA’s Office of Orphan Products Development (“OOPD”), with respect to the Dupuytren’s Licensed
Product.
Unless terminated earlier in accordance with its termination provisions, the Dupuytren’s License Agreement and the licenses granted under that agreement will continue in effect until the termination of our royalty
obligations. After that, all licenses granted to us under the Dupuytren’s License Agreement will become fully paid, irrevocable exclusive licenses.
Peyronie’s Disease
On August 27, 2008, we entered into an agreement with Dr. Martin K. Gelbard (the “Gelbard Agreement”) to improve the deal terms related to our future royalty obligations for PD by buying down our future royalty
obligations with a one-time cash payment. On March 31, 2012, we entered into an amendment to the Gelbard Agreement, which enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment and five additional
cash payments. Under the Gelbard Agreement, royalty obligations terminated five years after the first commercial sale, which occurred in January 2014. Accordingly, we ceased paying royalties in February 2019.
Cellulite
On August 23, 2007, we entered into the license agreement (“Cellulite License Agreement”) with the Research Foundation, pursuant to which the Research Foundation granted to the Company and its affiliates an exclusive
worldwide license, with the right to sublicense to certain third parties, the know-how owned by the Research Foundation related to the manufacture, preparation, formulation, use or development of (i) CCH and (ii) all pharmaceutical products
containing CCH, which are made, used and sold for the prevention or treatment of cellulite. Additionally, the Research Foundation granted to us an exclusive license to the patent applications in respect of cellulite. The license granted under the
Cellulite License Agreement is subject to the non-exclusive license (with right to sublicense) granted to the U.S. government by the Research Foundation in connection with the U.S. government’s funding of the initial research.
In consideration of the license granted under the Cellulite License Agreement, we agreed to pay to the Research Foundation certain royalties on net sales (if any) of pharmaceutical products containing CCH, which are
made, used and sold for the prevention or treatment of cellulite (each a “Cellulite Licensed Product”). In addition, the Company and the Research Foundation will share in any milestone payments and sublicense income received by us in respect of the
rights licensed under the Cellulite License Agreement. We paid a portion of the $0.5 million milestone payment we received from Auxilium in respect of its exercise of cellulite as an addition indication under the License Agreement, subject to
certain credits for certain up-front payments we made to the Research Foundation.
Our obligation to pay royalties to the Research Foundation with respect to sales by us, our affiliates or any sublicensee of any Cellulite Licensed Product in any country (including the U.S.) arises only upon the
first commercial sale of a Cellulite Licensed Product and is dependent upon there being a specified Research Foundation patent with valid claims covering the particular Cellulite Licensed Product.
Unless terminated earlier in accordance with its termination provisions, the Cellulite License Agreement and licenses granted under that agreement will continue in effect until the termination of our royalty
obligations. After that, all licenses granted to us under the Cellulite License Agreement will become fully paid, irrevocable exclusive licenses.
Frozen Shoulder
On November 21, 2006, we entered into a license agreement (the “Frozen Shoulder License Agreement”) with the Research Foundation, pursuant to which the Research Foundation granted to us and our affiliates an
exclusive worldwide license, with the right to sublicense to certain third parties, the know-how owned by the Research Foundation related to the development, manufacture, use or sale of (i) CCH and (ii) all pharmaceutical products containing CCH or
injectable collagenase, in each case to the extent it pertains to the treatment and prevention of frozen shoulder.
Additionally, the Research Foundation granted to us an exclusive license to the patent applications in respect of frozen shoulder. The license granted to us under the Frozen Shoulder License Agreement is subject to
the non-exclusive license (with right to sublicense) granted to the U.S. government by the Research Foundation in connection with the U.S. government’s funding of the initial research.
In consideration of the license granted under the Frozen Shoulder License Agreement, we agreed to pay to the Research Foundation certain royalties on net sales (if any) of pharmaceutical products containing CCH or
injectable collagenase for the treatment and prevention of frozen shoulder (each a “Frozen Shoulder Licensed Product”). In addition, the Company and the Research Foundation will share in any milestone payments and sublicense income received by us
in respect of the rights licensed under the Frozen Shoulder License Agreement.
Our obligation to pay royalties to the Research Foundation with respect to sales by us, our affiliates or any sublicensee of any Frozen Shoulder Licensed Product in any country (including the U.S.) arises only upon
the first commercial sale of a Frozen Shoulder Licensed Product. Our obligation to pay royalties to the Research Foundation will continue until) the expiration of the last valid claim of a university patent pertaining to a Frozen Shoulder Licensed
Product.
Unless terminated earlier in accordance with its termination provisions, the Frozen Shoulder License Agreement and licenses granted under that agreement will continue in effect until the termination of our royalty
obligations. After that, all licenses granted to us under the Frozen Shoulder License Agreement will become fully paid, irrevocable exclusive licenses.
Removal or Treatment of Fat
On March 27, 2010, we entered into the in-licensing and royalty agreement with Dr. Zachary Gerut (the “Gerut License Agreement”), pursuant to which, Dr. Gerut granted to us and our affiliates an exclusive worldwide
license, with the right to sublicense to certain third parties the know-how owned by Dr. Gerut related to the manufacture, preparation, formulation, use or development of (i) CCH and (ii) all pharmaceutical products containing CCH or injectable
collagenase, in each case to the extent it pertains to the removal or treatment of fat. As the in-license granted under the Gerut License Agreement pertains to the treatment of fat, this in-license also relates to both human lipoma and canine
lipoma.
In consideration of the license granted under the Gerut License Agreement, we agreed to pay to Dr. Gerut certain royalties on net sales (if any) of pharmaceutical products containing CCH that are made, used and sold
for the removal or treatment of fat in humans or animals (each a “Gerut Licensed Product”). In addition, in the event the FDA approves a Gerut Licensed Product, we agreed to make a one-time stock option grant to Dr. Gerut with a strike price equal
to the closing trading price on the day before the date of such grant.
Our obligation to pay royalties to Dr. Gerut with respect to sales by us, our affiliates or any sublicensee of any Gerut Licensed Product in any country (including the U.S.) arises only upon the first commercial sale
of a Gerut Licensed Product. Our obligation to pay royalties to Dr. Gerut will continue until June 3, 2016 or such longer period as we continue to receive royalties for such Gerut Licensed Product.
Unless terminated earlier in accordance with its termination provisions, the Gerut License Agreement and licenses granted under that agreement will continue in effect until the termination of our royalty obligations.
After that, all licenses granted to us under the Gerut License Agreement will become fully paid, irrevocable exclusive licenses. We do not view the Gerut License Agreement as covering the use of XIAFLEX® for cellulite, because it does not involve
the removal or treatment of fat.
Other Indications
We may enter into certain other license and royalty agreements with respect to other indications that we may elect to pursue.
COMPETITION
We and our licensees face worldwide competition from larger pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms, universities and other research institutions and government agencies
that are developing and commercializing pharmaceutical products. Many of our competitors have substantially greater financial, technical and human resources than we have and may subsequently develop products that are more effective, safer or less
costly than any products that we have developed, are developing, or will develop, or that are generic products. Our success will depend on our ability to acquire, develop and commercialize products and our ability to establish and maintain markets
for our products that receive marketing approval. Our marketed indication for PD currently enjoys Orphan Drug Protection until December 6, 2020. Orphan drug status for DC expired on February 2, 2017. For more information on orphan drug
designations, please see the discussion below. We may face greater competition, including from biosimilars, after the expiration of the orphan drug designations and the expiration of the 12-year marketing exclusivity under certain laws as further
described below in “Public Health Service Act and Biologics Price Competition and Innovation Act.”
GOVERNMENT REGULATION
Government authorities in the United States, at the federal, state, and local level, and in other countries, extensively regulate, among other things, the research, development, testing, approval, manufacture,
packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, reporting, marketing, import, and export of biopharmaceutical products such as those we and our partners are developing and have developed. In addition,
manufacturers of biopharmaceutical products participating in Medicaid and Medicare are required to comply with mandatory price reporting, discount, and rebate requirements, among other requirements. Failure to comply with these requirements can
result in exclusion from program coverage and debarment from government contracts. Federal law also limits the reimbursement rate Medicaid and Medicare pay providers. Many states have laws similar to federal laws that regulate marketing and sales
within the state and some have imposed price reporting obligations and restrictions on price increases within the state. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent
compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources. In the United States, the FDA regulates our and our partners’ products and product candidates as biologics, a drug subset,
under the Federal Food, Drug, and Cosmetic Act (“FDCA”), the Public Health Services Act (“PHSA”), and their implementing regulations.
Any product labeled for use in humans requires regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical trials
to demonstrate their safety, purity, and potency, and must comply with additional regulatory requirements of the FDA and similar regulatory authorities in foreign countries, such as the European Medicines Agency (the “EMA”) in Europe and the
Pharmaceuticals and Medical Devices Agency (the “PMDA”) in Japan. Preclinical studies include laboratory evaluation of chemistry, pharmacology, toxicity, and product formulation, as well as animal studies to assess potential safety and efficacy.
Clinical and preclinical trials must be conducted in accordance with the applicable regulatory standards, good clinical practices (“GCPs”), and good laboratory practices (“GLPs”), respectively. The process of obtaining marketing approvals and the
compliance with federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources.
Clinical trials involve the administration of the investigational product candidate or approved products to human subjects under the supervision of qualified investigators. Each trial must be conducted under an FDA
Investigational New Drug Application (“IND”). Prior to commencing the first clinical trial with a product candidate, an IND sponsor must submit the results of the preclinical tests and preclinical literature, together with manufacturing
information, analytical data, any available clinical data or literature, and proposed clinical study protocols among other things, to the FDA as part of an IND. An IND automatically becomes effective 30 days after receipt by the FDA, unless the
FDA, within the 30-day time period, notifies the applicant of safety concerns or questions related to one or more proposed clinical trials and places the trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any
outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during trials due to safety concerns or noncompliance. As a result, submission of an IND may not result in FDA
authorization to commence a clinical trial.
In addition to FDA review and supervision, each trial must also be reviewed, approved and conducted under the auspices of an independent institutional review board (“IRB”), and each trial must include the patient’s
informed consent. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits, and whether the planned human subject protections are
adequate. The IRB must continue to oversee the clinical trial while it is being conducted. Once an IND is in effect, each new clinical protocol and any amendments to the protocol must be submitted to the IND for FDA review, and to the IRB for
approval. Investigators must also provide certain information to the clinical trial sponsors to allow the sponsors to make certain financial disclosures to the FDA. Clinical trials are conducted under protocols detailing, among other things, the
objectives of the study and the parameters to be used in assessing the safety and the effectiveness of the biologic, and a statistical analysis plan. A protocol for each clinical trial, and any subsequent protocol amendments, must be submitted to
the FDA as part of the IND.
Typically, clinical evaluation involves a time-consuming and costly three-phase sequential process, but the phases may overlap.
There are typically multiple studies conducted within any given phase to collect the data necessary to support a marketing application. The 21st Century Cures Act, however, provides for FDA acceptance of new kinds of
data such as patient experience data and, for appropriate indications sought through supplemental marketing applications, data summaries. Real world evidence may also be used to assist in clinical trial design and to support marketing
applications. The FDA may also require, or companies may conduct, additional clinical trials for the same indication after a product is approved, referred to as Phase 4 studies. Moreover, FDA requires pediatric studies either before or after
product approval, if the product candidate is not eligible for a waiver. Concurrent with clinical trials, companies usually complete additional animal studies, develop additional chemistry, manufacturing, and controls information, including
stability, and finalize a process for manufacturing the product in commercial quantities in accordance with Current Good Manufacturing Practice (“cGMP”) requirements.
Information about certain clinical trials, including a description of the study and study results, must be submitted within specific timeframes to the National Institutes of Health (“NIH”), for public dissemination
on their clinicaltrials.gov website. Moreover, under the 21st Century Cures Act, manufacturers or distributors of investigational products for the diagnosis, monitoring, or treatment of one or more serious diseases or conditions must have a
publicly available policy concerning expanded access.
In addition to requirements concerning the conduct of clinical and preclinical trials, the manufacture of investigational biologics for the conduct of human clinical trials is subject to cGMP requirements. Sponsors
of clinical trials must provide FDA annual updates on their development program and more frequent reports in the case of serious adverse events. Investigational biologics and active ingredients imported into the United States are also subject to
regulation by the FDA relating to their labeling and distribution. Further, the export of investigational products outside of the United States is subject to regulatory requirements of the receiving country as well as U.S. export requirements.
Clinical testing may not be completed successfully within any specified time period, if at all. The FDA monitors the progress of all clinical trials that are conducted in the U.S. and may, at its discretion,
reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA can also provide specific guidance on the acceptability of protocol design
for clinical trials. The FDA, an IRB, the Company or its partners may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk, the
clinical trial is not being conducted in accordance with the FDA’s or the IRB’s requirements, the product has been associated with unexpected serious harm to the subjects, or based on evolving business objectives or competitive climate. The FDA can
also request that additional clinical trials be conducted as a condition to product approval. During all clinical trials, physicians monitor the patients to determine effectiveness and/or to observe and report any reactions or other safety risks
that may result from use of the product candidate.
Assuming successful completion of the required clinical trials, sponsors submit the results of preclinical studies and clinical trials, together with other detailed information including information on the chemistry,
manufacture and control of the product, to the FDA, in the form of a Biologics License Application (“BLA”), requesting approval to market the product for one or more indications. In most cases, the BLA must be accompanied by a substantial user fee,
which must be paid at the time of the first submission, if not waived. Orphan products, discussed further below, are not subject to application user fees unless the application includes an indication other than the orphan indication.
Within 60 days of receiving an application, the FDA determines if the application will be considered filed, meaning that it is substantially complete to permit a substantive review. If the FDA does not accept an
application for filing, it must be resubmitted with the FDA requested information. Once the submission is accepted for filing, the FDA begins an in‑depth substantive review to determine, among other things, whether a product is safe, pure, and
potent, and whether the manufacturing methods and controls are adequate. The FDA also will inspect the product manufacturing facilities and selected clinical trial sites. The FDA will not approve the BLA unless cGMP and GCP compliance is
satisfactory. The FDA may further refer a BLA to an advisory committee, which is a panel of experts, that recommend whether the application should be approved and under what conditions. The FDA aims to complete its review of standard BLAs within
ten months from the 60‑day filing date. This timeframe, however, may not be met or may be extended.
The FDA will issue an approval letter, authorizing commercial marketing, if it determines that the BLA, clinical and pre-clinical trial conduct, manufacturing process and manufacturing facilities are acceptable. If
the FDA determines that the BLA, clinical or pre-clinical trial conduct, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in a complete response letter (“CRL”), indicating that the application
is not ready for approval, and will often request additional testing, clinical trials, or information. If a CRL is issued, the applicant may either: (1) resubmit the BLA, addressing all of the deficiencies identified in the letter; (2) withdraw the
application; or (3) request an opportunity for a hearing. The FDA has the goal of reviewing resubmissions in either two or six months of the resubmission date, depending on the kind of resubmission. Notwithstanding the submission of any requested
additional information, the FDA ultimately may decide that the BLA does not satisfy the regulatory criteria for approval and refuse to approve the BLA.
The testing and approval process requires substantial time, effort and financial resources, which may take several years to complete. The FDA may not grant approval on a timely basis, or at all. The Company or its
partners may encounter difficulties or unanticipated costs in our or their efforts to secure necessary governmental approvals, which could delay or preclude us or them from marketing our products. Furthermore, the FDA may prevent a sponsor from
marketing a product under a label for its desired indications or place other conditions, including restrictive labeling, on distribution as a condition of any approvals, which may impair commercialization of the product. After approval, some types
of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.
If the FDA approves the BLA, the product can be marketed to physicians to prescribe in the U.S. The FDA, however, may approve product candidates for fewer or more limited indications or uses than requested, may
require significant safety warnings, including black box warnings, contraindications, and precautions, may grant approval contingent on the performance of costly post-marketing clinical trials, surveillance, or other requirements, including REMS,
to monitor the safety or efficacy of the product, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for successful commercialization. The REMS plan could include medication guides,
physician communication plans, and elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools. An assessment of the REMS must also be conducted at set intervals. For example, the use
of XIAFLEX® for the treatment of PD is subject to a REMS which requires health care provider training and certification, healthcare provider risk education, certification of dispensing pharmacies and health care settings, dispenser confirmation
that the prescribing physician is certified under the REMS, Endo auditing of certified pharmacies and health settings, and patient risk education. Following product approval, a REMS may also be required by the FDA if new safety information is
discovered and the FDA determines that a REMS is necessary to ensure that the benefits of the biologic outweigh the risks.
After approval, the sponsor must comply with a number of post-approval requirements, including delivering periodic reports to the FDA (i.e., annual reports), submitting descriptions of any adverse reactions reported,
biological product deviation reporting, and complying with sampling and distribution requirements, including tracking and tracing requirements and suspect and illegitimate product investigation and notification requirements, ensuring products are
properly imported and exported, as well as any other requirements set forth in the FDA’s approval (such as REMS and Phase 4 studies). The holder of an approved BLA is further required to provide updated safety and efficacy information and to comply
with requirements concerning advertising and promotional labeling. The holder must also ensure compliance with other FDA requirements including requirements related to manufacturing, recordkeeping, advertising, marketing, promotion, and certain
electronic records and signatures. For instance, the holder must ensure that approved products are not promoted for unapproved uses and are otherwise marketed in accordance with FDA’s promotional requirements. Improper promotion can subject the
holder to significant enforcement by FDA, other regulatory authorities, and private parties.
Also, quality control and manufacturing procedures must continue to conform to cGMP after approval. Manufacturers and their subcontractors are required to register their facilities with the FDA and certain state
agencies, list their products, and are subject to periodic unannounced inspections by the FDA to assess compliance with cGMP which impose procedural and documentation requirements relating to manufacturing, quality assurance and quality control. In
some case, after a BLA is approved, the product may also be subject to official lot release as a condition of approval. As part of the manufacturing process, the manufacturer is required to perform certain tests on each lot of the product before it
is released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a release protocol showing the results of all of the manufacturer’s tests
performed on the lot. The FDA may also perform certain confirmatory tests on lots of some products before releasing the lots for distribution by the manufacturer. FDA regulations also require investigation and correction of any deviations from cGMP
and specifications, and impose reporting and documentation requirements upon the sponsor and any third‑party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of
production and quality control to maintain compliance with cGMP and other regulatory requirements. There also are continuing annual program user fee requirements for any approved products. Orphan products, however, may be exempt from program fees
under certain circumstances.
In addition to studies requested by the FDA after approval, a sponsor may conduct other trials and studies to explore use of the approved product for treatment of new indications, which require submission of a
supplemental or new BLA and FDA approval of the new labeling claims. The purpose of these trials and studies is to broaden the application and use of the product and its acceptance in the medical community.
We use, and will continue to use, third-party manufacturers to produce our products in clinical quantities. We additionally use third-party contract research organizations, clinical trial sites, and outside
laboratories to conduct our clinical and preclinical studies. Future FDA inspections may identify compliance issues at our facilities, at the facilities of our contract manufacturers and other third parties or at those of our partners that may
disrupt production or distribution, disrupt clinical or preclinical studies, or require substantial resources to correct. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or
frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in significant regulatory actions. Such actions may include restrictions on a product, studies, manufacturer or holder of an approved BLA,
refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, imposition of a clinical hold or termination of clinical trials, warning letters, untitled letters, cyber letters, modification of promotional
materials or labeling, provision of corrective information, imposition of post‑market requirements including the need for additional testing, imposition of distribution or other restrictions under a REMS, product recalls or withdrawals, product
seizures or detentions, refusal to allow imports or exports, total or partial suspension of production or distribution, FDA debarment, injunctions, fines, consent decrees, corporate integrity agreements, debarment from receiving government
contracts and new orders under existing contracts, exclusion from participation in federal and state healthcare programs, restitution, disgorgement, or civil or criminal penalties, including fines and imprisonment, and result in adverse publicity,
among other adverse consequences. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. Also, new government requirements
may be established that could delay or prevent regulatory approval of our products under development.
INTELLECTUAL PROPERTY AND RIGHTS
Our success will depend in part on our ability to protect our existing products and the products we acquire or in-license by obtaining and maintaining a strong proprietary position both in the U.S. and in other
countries. To develop and maintain such a position, we intend to continue relying upon patent protection, trade secrets, know-how, continuing technological innovations and licensing opportunities. In addition, we intend to seek patent protection
whenever available for any products or product candidates and related technology we develop or acquire in the future.
The following table sets forth information as of December 31, 2019 regarding our principal patents:
Patents
We are the assignee or licensee of various U.S. patents, which have also been issued as patents in various foreign countries. Pursuant to our August 31, 2011 settlement agreement with Auxilium, we are co-owners of
U.S. Patent No. 7,811,560, entitled Compositions and Methods for Treating Collagen-Mediated Diseases, a patent relevant to XIAFLEX®, sold by Endo as a treatment for DC and PD. We expect this patent will expire in July 2028. In addition, we have
licenses to other pending patent applications. Although we believe these patent applications, if they issue as patents, will provide a competitive advantage, the scope of the patent positions of pharmaceutical firms involves complex legal,
scientific and factual questions and, as such, is generally uncertain. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, we do not know whether any of our current
patent applications, or the products or product candidates we develop, acquire or license will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection, will be of any value to us
or will be challenged, circumvented or invalidated by our competitors or otherwise.
While we attempt to ensure that our product candidates and the methods we employ to manufacture them do not infringe other parties’ patents and proprietary rights, competitors or other parties may assert that we
infringe their proprietary rights. Because patent applications in the U.S. and some other jurisdictions can proceed in secrecy until patents issue, third parties may obtain other patents without our knowledge prior to the issuance of patents
relating to our product candidates, which they could attempt to assert against us. Also, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of
inventions covered by pending patent applications.
Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual property rights of third parties, we cannot be certain that a third party will not
challenge our position in the future. If a third party alleges that we are infringing its intellectual property rights, we may need to obtain a license from that third party, but there can be no assurance that any such license will be available on
commercially acceptable terms or at all. Any infringement claims that result in litigation could result in substantial cost to us and the diversion of management’s attention from our core business. To enforce patents issued, assigned or licensed to
us or to determine the scope and validity of other parties’ proprietary rights, we may also become involved in litigation or in interference proceedings declared by the United States Patent and Trademark Office (“USPTO”), which could result in
substantial costs to us or an adverse decision as to the priority of our inventions. We may be involved in interference and/or opposition proceedings in the future. We believe there will continue to be litigation in our industry regarding patent
and other intellectual property rights.
As discussed above, we have licensed to Endo our injectable collagenase for the treatment of DC, PD, frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis, and human lipoma. We also have an
issued patent directed to a method of fermenting Clostridium histolyticum to obtain collagenase, namely U.S. Patent No. 10,119,131, issued November 6, 2018 (expiration September 9, 2032).
Orphan Drug Designations
Two indications, DC and PD, have received orphan drug designation from the OOPD. These indications did not receive the European equivalent of orphan drug designation.
The orphan drug provisions of the FDCA provide incentives to biologics sponsors to develop and supply products for the treatment of rare diseases, currently defined as diseases that affect fewer than 200,000
individuals in the U.S. or, for a disease that affects more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a product for such disease or condition
will be recovered from its sales in the U.S. If there is a product already approved by the FDA that is intended for the same indication and that is considered by the FDA to be the same as the already approved product, sponsors must present a
plausible hypothesis for clinical superiority to obtain orphan designation. This hypothesis must be demonstrated to obtain orphan exclusivity. Under the orphan regulations, the holder of the first FDA approval of a designated orphan product will
be granted a seven-year period of marketing exclusivity for that product for the orphan indication which means the FDA may not approve any other application to market the same product for the same indication except in limited circumstances, such as
a showing of clinical superiority over the product with orphan exclusivity. In the case of DC, orphan drug status expired on February 2, 2017; in the case of PD, orphan drug status expires on December 6, 2020. Orphan exclusivity would not prevent
other products from being approved for the same indication or the same biologic from being approved for different indications. If orphan drug designation is granted prior to product approval, companies developing orphan drugs may also be eligible
for tax credits for expenses associated with clinical trials, including a 20-year tax carry-forward, and FDA grants. The tax advantages, however, were limited in the 2017 Tax Cuts and Jobs Act.
Public Health Service Act and Biologics Price Competition and Innovation Act
XIAFLEX® is regulated and marketed as a biologic product pursuant to BLAs. The Company and its partner’s other product candidates will also be regulated and marketed as biologic products pursuant to a BLA. XIAFLEX®
was licensed based on a determination by the FDA of safety, purity, and potency as required under the PHSA. In 2010, Congress enacted the Biologics Price Competition and Innovation Act of 2009 (“BPCIA”), as part of the Patient Protection and
Affordable Care Act, which amended the PHSA to create an abbreviated licensure pathway for products deemed to be biosimilar to or interchangeable with FDA-licensed reference biological products as well as protections for reference biologics.
Under the BPCIA, a reference biologic is granted 12 years of exclusivity from the time of first licensure. During this 12-year period, no application for a biosimilar product can be submitted for four years from the
date of licensure of the reference product, which in the case of XIAFLEX® was 2014, and FDA may not make a biosimilar product approval effective until the expiration of the 12 years, which we believe, in the case of XIAFLEX®, will be 2022. Not all
reference product biologic applications and supplements, however, will qualify for 12 years of exclusivity. For instance, certain changes and supplements to an approved BLA, and subsequent applications filed by the same sponsor, manufacturer,
licensor, predecessor in interest, or other related entity do not qualify for the 12-year exclusivity period. The BPCIA also includes provisions to protect reference products that have patent protection. The biosimilar product sponsor and reference
product sponsor may exchange certain patent and product information for the purpose of determining whether there should be a legal patent challenge. Based on the outcome of negotiations surrounding the exchanged information, the reference product
sponsor may bring a patent infringement suit and injunction proceedings against the biosimilar product sponsor. The biosimilar applicant may also be able to bring an action for declaratory judgment concerning the patent.
Under the BPCIA, following the expiration of a 12-year reference exclusivity period, the FDA may license under section 351(k) of the PHSA a biologic that it determines is biosimilar to or interchangeable with a
reference product. Biosimilarity means that the section 351(k) product is highly similar to the reference product notwithstanding minor differences in clinically inactive components and that there are no clinically meaningful differences between
the section 351(k) product and the reference product in terms of the safety, purity, and potency of the product. To be considered interchangeable, a product must be biosimilar to the reference product, be expected to produce the same clinical
result as the reference product in any given patient, and, if administered more than once to an individual, the risks in terms of safety or diminished efficacy of alternating or switching between use of the product and its reference product is not
greater than the risk of using the reference product without such alternation or switch. Interchangeable products may be substituted for the reference product without the intervention of the prescribing doctor. Licensure of a biosimilar or
interchangeable product under section 351(k) generally requires less than the full complement of product-specific preclinical and clinical data required for innovator products licensed under section 351(a). Per FDA draft guidance, sponsors of
biosimilar and interchangeable products are not required to seek FDA licensure for all of the indications for which the reference product has approval, though interchangeable product sponsors are encouraged to do so. The FDA has considerable
discretion over the kind and amount of scientific evidence required to demonstrate biosimilarity and interchangeability. Depending on the product, additional periods of regulatory exclusivity may be available.
Recently, Congress, the Administration, and administrative agencies have taken certain measures to increase biosimilar competition and thus, decrease biologic prices. By example, in 2019 FDA introduced a draft
guidance to facilitate biologic importation. Congress also passed a bill requiring sponsors of BLA approved products to provide sufficient quantities of biologic products on commercially reasonable market based terms to entities developing
biosimilar products.
Trade Secrets
We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our trade secrets.
It is our policy to require certain employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or
consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.
EMPLOYEES
The Company currently has seven employees, all of whom are full-time, and two independent contractors.
CORPORATE INFORMATION
The Company was incorporated in Delaware in 1990; the Company’s subsidiary, ABC-NY, was incorporated in New York in 1957. Our telephone number is 516-593-7000. Our corporate headquarters currently are located at 35
Wilbur St., Lynbrook, NY 11563, as further described in this Report under “Item 2 – Properties.”
AVAILABLE INFORMATION
Our annual, quarterly and current reports, proxy statements and other information are filed or furnished with the Securities and Exchange Commission (“SEC”). These filings are available to the public over the
Internet at the SEC web site at http://www.sec.gov.
Our website address is www.biospecifics.com. We make available free of charge, through our website’s “Investors” page, our annual, quarterly and current reports, and amendments to those reports, as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Our Code of Ethics, which applies to all of our employees, including our principal executive officer and principal financial officer, and non-employee directors, is reasonably designed to deter wrongdoing and to
promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure in reports and
documents filed with, or submitted to, the SEC and in other public communications made by the Company, (iii) compliance with applicable governmental laws, rules and regulations, (iv) the prompt internal reporting of violations of the Code of
Ethics to appropriate persons identified in the Code of Ethics, and (v) accountability for adherence to the Code of Ethics. Our Code of Ethics is available on the “Investors” page of our website at investors.biospecifics.com. You may request a
copy of our SEC filings (excluding exhibits) and our Code of Ethics at no cost by writing or telephoning us at the above-referenced corporate address or telephone number.
The references to our web site and the SEC’s web site are intended to be inactive textual references only and the contents of those websites are not incorporated by reference herein.
SUBSEQUENT EVENTS
Effective January 6, 2020, the Company’s Board of Directors (the “Board”) appointed Mr. Patrick C. Hutchison as Chief Financial Officer of the Company.
On January 7, 2020, the Company announced that it will be relocating its headquarters to Wilmington, Delaware, effective April 7, 2020.
In connection with the termination of the lease agreement for the facility located at 35 Wilbur Street, Lynbrook, New York 11563 and
the relocation of the Company’s headquarters to Wilmington, Delaware, the Company terminated certain of its employees and consultants (collectively, the “Terminated Employees”). The Company will pay a total of approximately $1.1 million in
severance payments and benefits to the Terminated Employees.
In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together,
could materially and adversely affect our business, financial position or results of operations. If one or more of these or other risks or uncertainties materialize or if our underlying assumptions prove to be incorrect, our actual results may vary
materially from what we projected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also impair our business or financial position.
Please also see the “Special Note Regarding Forward Looking Statements” on page 4 of this Annual Report on Form 10-K.
Risks Related to Our Limited Sources of Revenue
We are dependent on Endo for future opt-in, milestone, mark-up on cost of goods sold and royalty payments.
Our sole source of revenue is from opt-in, milestone, mark-up on cost of goods sold and royalty payments from Endo under the License Agreement. As described in Item 1 above, under the License Agreement, in exchange
for the right to receive royalties and other payments, we have granted to Endo the right to develop, manufacture, market and sell worldwide products (other than dermal formulations for topical administration) that contain collagenase for the
treatment of DC, PD, frozen shoulder, cellulite, canine lipoma, plantar fibromatosis, lateral hip fat and human lipoma. However, we have no control over Endo’s ability to successfully market, sell and manufacture products for the treatment of DC
and PD, or, in the case of frozen shoulder, cellulite, canine lipoma, plantar fibromatosis, lateral hip fat and human lipoma, to pursue approval and commercialization. Therefore, we may receive limited, if any, royalty payments from Endo.
Under the License Agreement, royalty payments are subject to set-off for certain expenses we owe Endo related to development and patent costs. While the deductions are increasing over time, we anticipate that the
amount of royalties due to us will continue to exceed the amount of any set-offs.
In addition, we have granted to Endo an opt-in right to expand its license and development rights to one or more additional indications for injectable collagenase not currently licensed to Endo, including for the
treatment of uterine fibroids. Endo may exercise its opt-in prior the Company’s submission of a clinical trial report to Endo, with the Company’s consent. Alternatively, Endo may opt-in following our submission of such a report. If Endo exercises
its opt-in with respect to an additional indication, we are entitled to receive a one-time license fee for the rights to, as well as potential milestone, royalty and other payments with respect to, such new indication. If Endo does not exercise its
opt-in for any additional indication, we may offer to any third party such development rights with regard to products in the Endo Territory (as defined in the License Agreement), provided that we first offer the same terms to Endo, or develop the
product ourselves. Endo has no obligation to exercise its opt-in with respect to any such additional indication, and its decision to do so is in its complete discretion. Clinical trials can be expensive and the results are subject to different
interpretations, and therefore, there is no assurance that after conducting Phase 2 clinical trials on any additional indication, and incurring the associated expenses, Endo will exercise its opt-in or we will receive any revenue from it. Under the
License Agreement, we may only offer to a third party development rights with regard to products in the Endo Territory and not in Europe and certain Eurasian countries. Even if Endo exercises its opt-in as to any additional indication, its
obligations to develop the product for such indication are limited to initiating Stage II Development (as defined in the License Agreement) for such additional indication within one year of exercising the opt-in as to such indication.
As there is uncertainty surrounding Endo’s plans for licensed indications, decisions made by Endo may negatively impact our financial position.
We have no control over Endo’s future plans for any licensed indications. We have received in the past, and are entitled to receive in the future, certain milestone payments from Endo in respect of its efforts to
commercialize products, but we have no control over Endo’s ability to achieve the milestones. Endo is in the process of terminating their partnership agreements with Sobi, Asahi, and Actelion, which will reduce the amount of royalty revenues (in
the form of sublicense income) received by us.
Even if Endo or its sublicensees pursues development and commercialization, there is no guarantee that the FDA or equivalent foreign regulatory body will approve XIAFLEX® for a given indication or that
commercialization will be successful. Moreover, Endo’s review of pipeline indications has been ongoing since 2015; since that time, only the indication for cellulite has advanced in development.
Endo’s ongoing commercial review of the XIAFLEX® exercised but non-marketed indications are uncertain.
There is no guarantee that Endo will pursue the commercialization of XIAFLEX® exercised but non-marketed indications, including cellulite, frozen shoulder and plantar fibromatosis, nor that it will exercise its
rights to opt in for any additional indications, including uterine fibroid.
Due to our dependence on Endo, Endo’s failure to achieve projected revenues could have a material adverse effect on our business.
As discussed above, our performance is substantially dependent on Endo’s performance, stability and success. Endo’s operations are substantially dependent on the continued services and performance of its senior
management and other key personnel as well as the stability and performance of its various business units. The on-going reshaping of Endo’s business to deliver, the restructuring of the generics business, and litigation and associated legal
reserves could have the effect of distracting the attention of management and other resources away from the commercialization and further development of XIAFLEX®, thereby materially and adversely impacting our financial condition by slowing down
the growth of, or reducing, XIAFLEX® sales and development and payments by Endo to us for royalties, cost of goods sold, milestones, and sublicense income.
Our dependence upon revenue from Endo makes us subject to the commercialization and other risk factors affecting Endo over which we have limited or no control, including those risk factors identified by Endo in its
Form 10-K for the fiscal year ended December 31, 2019, filed on February 26, 2020.
Risks Related to Our Dependence on Endo
We are dependent upon revenue from Endo and Endo’s operating success or failure has a significant impact on our potential royalty stream and other payment rights. The risk factors affecting Endo and, consequently,
us, include the following. Moreover, to the extent that we are independently developing product candidates and indications, we will also be subject to the below risks:
Endo is subject to various regulations pertaining to the marketing of their products and services.
Endo is subject to various federal and state laws pertaining to healthcare fraud and abuse, including prohibitions on the offer of payment or acceptance of kickbacks or other remuneration for the purchase of Endo’s
products and services, including inducements to potential patients to request Endo’s products and services and inducements to healthcare professionals to prescribe and use Endo’s products. Additionally, product promotion, educational activities,
support of continuing medical education programs, and other interactions with healthcare professionals and patients must be conducted in a manner consistent with the FDA regulations and the Anti-Kickback Statute. The Anti-Kickback Statute, with
certain statutory exemptions and safe harbor regulations as interpreted through opinions published by the Office of the Inspector General of the Department of Health and Human Services (“HHS-OIG”), prohibits persons or entities from knowingly and
willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under
federal healthcare programs, such as the Medicare and Medicaid programs. Violations of the Anti-Kickback Statute also carry potential federal False Claims Act liability. Additionally, many states have adopted laws similar to the Anti-Kickback
Statute, without identical exceptions or exemptions. Some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any third-party payer, not only the Medicare and Medicaid programs. Endo is also
required to report pricing information and provide rebates to federal programs and discounts to federal purchasers as conditions of payment by Medicaid and Medicare. Noncompliance with these requirements subjects a company to potential False
Claims Act liability and criminal, civil and administrative sanctions. Some states, such as California, also have their own price reporting obligations subject to state law. Any such new regulations or requirements may be difficult and expensive
for Endo to comply with, may delay Endo’s introduction of new products, may adversely affect Endo’s total revenues and may have a material adverse effect on Endo’s business, results of operations, financial condition and cash flows.
Sanctions for violating these laws include criminal penalties and civil sanctions and possible exclusion from federal funded healthcare programs such as Medicare and Medicaid as well as potential liability under the
False Claims Act and applicable state false claims acts. There can be no assurance that Endo’s practices will not be challenged under these laws in the future or that such a challenge would not have a material adverse effect on their business and
Endo’s business or results of operations.
In addition, Endo is subject to statutory and regulatory restrictions on the promotion of uses of prescription drugs that are not approved by the FDA. Although the FDA does not regulate a physician’s choice of
medications or treatments, the FDCA and FDA regulations and guidance significantly restrict the ability of pharmaceutical companies to communicate with patients, physicians, and other third-parties about unapproved product uses. FDA, Federal Trade
Commission (“FTC”), the HHS-OIG, the Department of Justice (“DOJ”) and various state Attorneys General actively enforce state and federal prohibitions on the promotion of unapproved uses, as well as prohibitions against promotional practices deemed
false or misleading. A company that is found to have improperly promoted its products under these laws may be subject to significant liability, including significant administrative, civil, and criminal sanctions, including but not limited to,
significant civil damages, criminal fines, and exclusion from participation in Medicare, Medicaid, and other federal healthcare programs. Applicable laws governing product promotion also provide for administrative, civil, and criminal liability for
individuals, including, in some circumstances, potential strict vicarious liability. Conduct giving rise to such liability could also form the basis for private civil litigation by third-party payers or other persons allegedly harmed by such
conduct, as well as qui tam actions under the federal False Claims Act in which the government could chose to intervene.
Endo has endeavored to establish and implement a corporate compliance program designed to prevent, detect, and correct violations of state and federal healthcare laws, including laws related to advertising and
promotion of Endo’s drugs. Nonetheless, the FDA, FTC, HHS-OIG, the DOJ and/or the state Attorneys General, and qui tam relators may take the position that Endo is not in compliance with such requirements, and, if such non-compliance is proven, Endo
and, in some cases, individual employees, may be subject to significant liability, including the aforementioned administrative, civil, and criminal sanctions. This could have a material adverse effect on Endo’s business and financial operations.
For instance, while not related to XIAFLEX® or any of our product candidates, in 2014, Endo entered into a settlement and corporate integrity agreement to resolve criminal and civil liability arising from its marketing of an unrelated drug.
The pharmaceutical industry is heavily regulated, which creates uncertainty about Endo’s ability to bring CCH products to market and imposes substantial compliance costs on
their business.
Governmental authorities such as the FDA impose substantial requirements on the development, manufacture, holding, labeling, marketing, advertising, promotion, distribution and sale of therapeutic pharmaceutical
products. Product candidates may not be marketed until completion of lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures, as well as the approval of marketing applications by regulatory authorities.
A failure to obtain satisfactory results in required pre-marketing trials may prevent Endo from obtaining required regulatory approvals. The FDA may also require companies to conduct post-approval studies and post-approval surveillance regarding
their drug products and does require companies to report adverse events and certain manufacturing issues.
Before obtaining regulatory approvals for the sale of any of Endo’s new product candidates, Endo must demonstrate through preclinical studies and clinical trials that the product is safe, pure and potent for each
intended use. Preclinical and clinical studies may fail to demonstrate the safety and effectiveness of a product. Likewise, Endo may not be able to demonstrate through clinical trials that a product candidate’s therapeutic benefits outweigh its
risks. Even promising results from preclinical and early clinical studies do not always accurately predict results in later, large scale trials. A failure to demonstrate safety and efficacy could or would result in Endo’s failure to obtain
regulatory approvals. Clinical trials can be delayed for reasons outside of Endo’s control, which can lead to increased development costs and delays in regulatory approval. For example, there is substantial competition to enroll patients in
clinical trials and such competition has delayed clinical development of Endo’s products in the past. For example, patients may not enroll in clinical trials at the rate expected or patients may drop out after enrolling in the trials or during the
trials. In addition, Endo relies on collaboration partners that may control or make changes in trial protocol and design enhancements, or encounter clinical trial compliance-related issues, which may also delay clinical trials or require that
clinical trials be suspended or terminated. Product supplies may be delayed or be insufficient to treat the patients participating in the clinical trials, or Endo, manufacturers, suppliers or other third parties may not meet the requirements of the
FDA or foreign regulatory authorities, such as those relating to cGMP or GCPs. To the extent that changes are made to a product during clinical or preclinical trials, studies may need to be repeated or additional studies may need to be conducted.
Such noncompliance may result in regulatory enforcement action and a regulatory authority’s determination that a product candidate is not approvable. Endo also may experience delays in obtaining, or Endo may not obtain, required initial and
continuing approval of Endo’s clinical trials from institutional review boards and regulatory authorities. There may also be issues with study design and conduct that do not become apparent until a study is underway or completed. Endo cannot
confirm that it will not experience delays or undesired results their clinical trials.
Endo cannot confirm that the FDA or foreign regulatory agencies will approve, clear for marketing or certify any products developed by Endo or that such approval will not subject the marketing of Endo’s products to
certain limits, such as limits on indicated use. The FDA or foreign regulatory authorities may not agree with Endo’s study design, or assessment of the clinical data or they may interpret it differently. Such regulatory authorities may require
additional or expanded clinical trials. Any limitation on use imposed by the FDA or delay in or failure to obtain FDA approvals or clearances of products developed by Endo would adversely affect the marketing of these products and Endo’s ability to
generate product revenue, which would adversely affect Endo’s financial condition and results of operations.
In addition, with respect specifically to pharmaceutical products, the submission of a marketing application to the FDA with supporting clinical safety and efficacy data, for example, does not guarantee that the FDA
will grant approval to market the product. Meeting the FDA’s regulatory requirements to obtain approval to market a drug product, which varies substantially based on the type, complexity and novelty of the pharmaceutical product, typically takes
years and is subject to uncertainty. The approval process for a new product varies in time. Approvals, if granted, may not include all uses (known as indications) for which a company may seek to market a product.
Further, during product development and once a product is approved for marketing, failure to comply with applicable regulatory requirements can result in regulatory enforcement actions, such as, but not limited to,
warning, untitled, or cyber letters, suspensions or withdrawals of approvals or clearances, refusals to approve pending applications or supplements, seizures or recalls of products, injunctions against or other restrictions on the manufacture,
holding, distribution, marketing and sale of a product, import or export refusals, product detention, promotional piece modifications and the issuance of corrective information, adverse publicity, regulatory authority issuance of public
communications regarding products, holds or terminations on pre- or post-market studies, liability for harm cause to patients, reputational harm, civil and criminal sanctions, and FDA debarment, suspension and debarment from government contracts,
and refusal of orders under existing government contracts, exclusion from federal healthcare programs, consent decrees, or corporate integrity agreements. Furthermore, changes in existing regulations or the adoption of new regulations could prevent
Endo from obtaining, or affect the timing of, future regulatory approvals or clearances. Meeting regulatory requirements and evolving government standards may delay marketing of Endo’s new products for a considerable period of time, impose costly
procedures upon Endo’s activities and result in a competitive advantage to larger companies that compete against Endo.
Based on scientific developments, post-market experience, or other legislative or regulatory changes, the current FDA standards of review for approving new pharmaceutical products, or new indications or uses for
approved products, are sometimes more stringent than those that were applied in the past.
The FDA has the authority to require companies to undertake additional post-approval studies to assess known or signaled safety risks and to make any labeling changes to address those risks. The FDA also can require
companies to formulate approved REMS to ensure a drug’s benefits outweigh its risks either for approval or following approval. Moreover, following approval, discovery of new product issues could also result in the withdrawal of product approval,
refusal to approve new product indications or similar products, holds or suspension of clinical studies, labeling restrictions, product recalls, changes in the way that the product is administered, produced or distributed, adverse publicity, public
statements by regulators, post-approval study or REMS requirements liability for harm cause to patients, or the product becoming less competitive, among other consequences. The FDA’s exercise of its authority under the FDCA could result in delays
or increased costs during product development, clinical trials and regulatory review, increased costs to comply with additional post-approval regulatory requirements and potential restrictions on sales of approved products. Foreign regulatory
agencies often have similar authority and may impose comparable requirements and costs. Post-marketing studies and other emerging data about marketed products, such as adverse event reports, may also adversely affect sales of Endo’s products or
prompt regulatory authorities to take regulatory actions with regard to the product. Furthermore, the discovery of significant safety or efficacy concerns or problems with a product in the same therapeutic class as one of Endo’s products that
implicate or appear to implicate the entire class of products could have an adverse effect on sales of Endo’s product or, in some cases, result in product withdrawals or other regulatory action. Furthermore, new data and information, including
information about product misuse or abuse at the user level, may lead government agencies, professional societies, practice management groups or patient or trade organizations to recommend or publish guidance or guidelines related to the use of
Endo’s products, which may lead to reduced sales of Endo’s products.
The FDA regulates and monitors the quality of drug clinical trials to provide human subject protection and to support marketing applications. The FDA may place a hold on a clinical trial and may cause a suspension or
withdrawal of product approvals if regulatory standards are not maintained. The FDA also regulates the facilities, processes, and procedures used to manufacture and market pharmaceutical products in the U.S. both for clinical supply and marketed
products. Manufacturing facilities must be registered with the FDA and all commercially distributed products made in such facilities must be manufactured in accordance with the latest cGMP regulations, which are enforced by the FDA. Changes to
manufacturers or the manufacturing process for commercially distributed products may require that the product sponsor conduct supporting studies, provide FDA with notification of the change, and/or obtain FDA’s approval before implementing the
change. Compliance with clinical trial requirements and cGMP regulations requires the dedication of substantial resources and requires significant expenditures. In the event an approved manufacturing facility for a particular drug is required by
the FDA to curtail or cease operations, cannot produce products or product candidates in accordance with regulatory requirements, or otherwise becomes inoperable, or a third-party contract manufacturing facility faces manufacturing problems, the
implementation of corrective actions, or obtaining the required FDA authorization to manufacture at the same or a different manufacturing site could be costly, and could result in production delays, which could adversely affect Endo’s business,
results of operations, financial condition and cash flow. Failure to abide by manufacturing requirements may also result in regulatory enforcement action, adverse publicity, and product recalls, among other consequences. Moreover, manufacturing
challenges may also be faced as product development and approval progresses, such as challenges related to manufacturing scale up, qualification, and validation. In the event Endo or its manufacturers cannot successfully meet all manufacturing
regulatory requirements, Endo’s business may be adversely impacted.
The FDA is authorized to perform inspections of U.S. and foreign manufacturing facilities and clinical trial sites under the FDCA. Following such inspections, the FDA may issue a Form 483 Notice of Inspectional
Observations. FDA may also issue an untitled letter that cites violations that do not meet the threshold of regulatory significance of a Warning Letter. FDA guidelines also provide for the issuance of Warning Letters for violations of “regulatory
significance” for which the failure to adequately and promptly achieve correction may be expected to result in an enforcement action. FDA also may issue Warning Letters and untitled letters in connection with events or circumstances unrelated to an
FDA inspection. Any of these may require Endo to modify certain activities identified by FDA.
Endo cannot determine what effect changes in regulations or legal interpretations or requirements by the FDA or the courts, when and if promulgated or issued, may have on Endo’s business in the future. Changes could,
among other things, require different labeling, monitoring of patients, interaction with physicians, education programs for patients or physicians, curtailment of necessary supplies, or limitations on product distribution. These changes, or others
required by the FDA could have an adverse effect on the sales of these products. The evolving and complex nature of regulatory science and regulatory requirements, the broad authority and discretion of the FDA and the generally high level of
regulatory oversight results in a continuing possibility that, from time to time, Endo will be adversely affected by regulatory actions despite Endo’s ongoing efforts and commitment to achieve and maintain full compliance with all regulatory
requirements.
Any issues that Endo or any other companies to which we grant licensing rights experience concerning regulatory and legal compliance generally, as well as the development, manufacturing, approval, sale, marketing,
promotion, and distribution specifically of our products and/or product candidates may limit the opt-in, mark up on cost of goods sold, milestone and/or royalty payments that we are due under our agreements.
The availability of third-party reimbursement for XIAFLEX® products is uncertain, and thus Endo may find it difficult to maintain current price levels. Additionally, the market
may not accept those products for which third-party reimbursement is not adequately provided.
Endo’s ability to commercialize products depends, in part, on the extent to which reimbursement for the costs of these products is available from government healthcare programs, such as Medicaid and Medicare, private
health insurers and others. Endo cannot be certain that, over time, third-party reimbursements for Endo’s products will be adequate for Endo to maintain price levels sufficient for realization of an appropriate return on Endo’s investment.
Government payers, private insurers and other third-party payers are increasingly attempting to contain healthcare costs by (1) limiting both coverage and the level of reimbursement (including adjusting co-pays) for products approved for marketing
by the FDA, (2) refusing, in some cases, to provide any coverage for uses of approved products for indications for which the FDA has not granted marketing approval and (3) requiring or encouraging, through more favorable reimbursement levels or
otherwise, preferred therapeutically equivalent branded products and the substitution of generic alternatives to branded products.
Endo may experience pricing pressure on the price of XIAFLEX® products due to social or political pressure to lower the cost of drugs, which would reduce our revenue and future
profitability.
Federal and state health care programs are increasingly focused on the price of prescription drugs, including the expanded use of mandatory rebates and discounts and measures that penalize or prohibit price increases
over inflation rates. Endo may experience downward pricing pressure on the price of Endo’s products due to social or political pressure to lower the cost of drugs, which would reduce Endo’s revenue and future profitability. Recent events have
resulted in increased public and governmental scrutiny of the cost of drugs, especially in connection with price increases following companies’ acquisitions of the rights to certain drug products. In particular, U.S. federal prosecutors recently
issued subpoenas to a pharmaceutical company seeking information about its drug pricing practices, among other issues, and members of the U.S. Congress have sought information from certain pharmaceutical companies relating to post-acquisition
drug-price increases. Endo’s revenue and future profitability could be negatively affected if these inquiries were to result in legislative or regulatory proposals that limit Endo’s ability to increase the prices of Endo’s products.
Pressure from social activist groups and future government regulations may also put downward pressure on the price of drugs, which could result in downward pressure on the prices of Endo’s products in the future.
If Endo’s manufacturing facilities are unable to manufacture XIAFLEX® products or the manufacturing process is interrupted due to failure to comply with regulations or for other
reasons, it could have a material adverse impact on our business.
If any of Endo’s manufacturing facilities or its third party manufacturing facilities fail to comply with regulatory requirements or encounter other manufacturing difficulties, it could adversely affect Endo’s
ability to supply products. All facilities and manufacturing processes used for the manufacture of pharmaceutical products are subject to inspection by regulatory agencies at any time and must be operated in conformity with cGMP. Compliance with
the FDA’s cGMP requirements applies to both drug products seeking regulatory approval and to approved drug products. In complying with cGMP requirements, pharmaceutical manufacturing facilities must continually expend significant time, money and
effort in production, recordkeeping, quality assurance and quality control so that their products meet applicable specifications and other requirements for product safety, efficacy and quality. Failure to comply with applicable legal requirements
subjects Endo and its third party manufacturing facilities to possible legal or regulatory action, including shutdown, which may adversely affect Endo’s ability to supply the product. Additionally, Endo’s or its third party manufacturing
facilities may face other significant disruptions due to labor strikes, failure to reach acceptable agreement with labor unions, infringement of intellectual property rights, vandalism, natural disaster, storm or other environmental damage, civil
or political unrest, export or import restrictions or other events. If Endo is unable to manufacture products at its or its third party manufacturing facilities because of regulatory, business or any other reasons, the manufacture and marketing of
these products would be interrupted. This could have a material adverse impact on Endo’s business, results of operation, financial condition, cash flows and competitive position, which could, in turn, materially impact our business.
For example, the manufacturing facilities that are qualified to manufacture CCH, which Endo sells under the trademark XIAFLEX® and may use from time to time in the research and development of CCH for other
investigational indications, such as for cellulite, are subject to such regulatory requirements and oversight. If such facilities fail to comply with cGMP requirements, Endo may not be permitted to sell products or may be limited in the
jurisdictions in which it is permitted to sell them. Further, if an inspection by regulatory authorities indicates that there are deficiencies, including non-compliance with regulatory requirements, Endo could be required to take remedial actions,
stop production or close its facilities, which would disrupt the manufacturing processes, limit the supply of CCH and delay clinical trials and subsequent licensure and/or limit the sale of commercial supplies. In addition, future noncompliance
with any applicable regulatory requirements may result in refusal by regulatory authorities to allow use of CCH in clinical trials, refusal of the government to allow distribution of CCH within the U.S. or other jurisdictions, criminal prosecution,
fines, recall or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products, refusal to allow the entering into of federal and state supply contracts and follow-on civil
litigation. Noncompliance with manufacturing requirements may also impede Endo’s ability to obtain marketing approval for future indications.
As Endo has limited experience in manufacturing biologic products and may encounter difficulties in its manufacturing processes, which could
materially adversely affect or delay or disrupt manufacture of those products reliant upon our manufacturing operations.
The manufacture of biologic products requires significant expertise and capital investment. Although Endo manufactures CCH, which is included in
its current XIAFLEX® product and in certain product candidates under development, including for the treatment of
cellulite, in its Horsham, Pennsylvania facility, Endo has limited experience in manufacturing CCH or any other biologic products. Biologics such as CCH require processing steps that are highly complex and generally more difficult than those
required for most chemical pharmaceuticals. If the manufacturing processes are disrupted at the facilities where its biologic products are manufactured, it may be difficult to find alternate manufacturing sites. Endo may encounter difficulties
with the manufacture of CCH, which could delay, disrupt or halt the manufacture of such products and/or product candidates, result in product recalls or product liability claims, require write-offs or otherwise have a material adverse effect on
its business, financial condition, results of operations and cash flows.
The regulatory approval process outside the U.S. varies depending on foreign regulatory requirements, and failure to obtain regulatory approval in foreign jurisdictions would
prevent the marketing of Endo’s products in those jurisdictions.
Endo has worldwide intellectual property rights to market many of Endo’s products and product candidates and intends to seek approval to market certain of Endo’s products outside of the U.S. Approval of a product by
the regulatory authorities of foreign countries must be obtained prior to manufacturing or marketing that product in those countries. The approval procedure varies among countries and can involve additional testing and the time required to obtain
such approval may differ from that required to obtain FDA approval. The non-U.S. regulatory approval process includes all of the risks associated with obtaining FDA approval set forth herein. Approval by the FDA does not secure approval by the
regulatory authorities of any other country, nor does the approval by foreign regulatory authorities in one country secure approval by regulatory authorities in other foreign countries or the FDA.
Moreover, the failure to obtain approval in one jurisdiction may compromise our or our partner’s ability obtain approval elsewhere. If Endo fails to comply with these regulatory requirements or fails to obtain and maintain required approvals,
Endo’s target market will be reduced and Endo’s ability to generate revenue from abroad will be adversely affected.
The expanding nature of Endo’s business in global markets exposes Endo to risks associated with adapting to emerging markets and taking advantage of growth opportunities.
The globalization of Endo’s business may expose Endo to increased risks associated with conducting business in emerging markets. Any difficulties in adapting to emerging markets could impair Endo’s ability to take
advantage of growth opportunities in these regions and a decline in the growth of emerging markets could negatively affect Endo’s business, results of operations or financial condition.
The expansion of Endo’s activities in emerging markets may further expose Endo to more volatile economic conditions and political instability. Endo also faces competition from companies that are already well
established in these markets. Endo’s inability to respond adequately to the unique characteristics of these markets, particularly with respect to their regulatory frameworks, the difficulties in recruiting qualified personnel, potential exchange
controls, weaker intellectual property protection, higher crime levels and corruption and fraud, could have a material adverse effect on Endo’s business.
Endo’s policies and procedures, which are designed to help Endo, Endo’s employees and agents comply with various laws and regulations regarding corrupt practices and anti-bribery, cannot guarantee protection against
liability for actions taken by businesses in which Endo invests. Failure to comply with domestic or international laws could result in various adverse consequences, including possible delay in the approval or refusal to approve a product, recalls,
seizures, withdrawal of an approved product from the market, or the imposition of criminal or civil sanctions, including substantial monetary penalties.
In addition, differences in banking systems and business cultures could have an adverse effect on the efficiency of internal controls over financial reporting matters. Given the significant learning curve to fully
understand the emerging markets’ business, operating environment and the quality of controls in place, Endo may not be able to adequately assess the efficiency of internal controls over financial reporting or the effects of the laws and
requirements of the local business jurisdictions.
Many jurisdictions require specific permits or business licenses, particularly if the business is considered foreign. These requirements may affect Endo’s ability to carry out Endo’s business operations in emerging
markets.
Endo has been, continues to be and may be the subject of lawsuits, product liability claims, other significant legal proceedings, government investigations or product recalls
for which it may be unable to obtain or maintain insurance adequate to cover potential liabilities.
Endo’s business exposes it to significant potential risks from lawsuits, product liability claims, other significant legal proceedings, government investigations or product recalls, including, but not limited to,
such matters associated with the testing, manufacturing, marketing and sale of our products. Some plaintiffs have received substantial damage awards in some jurisdictions against healthcare companies based upon various legal theories, including
without limitation claims for injuries allegedly caused by the use of their products. Endo has been, continues to be and may be subject to various product liability cases, as well as other significant legal proceedings and government
investigations.
For example, Endo and its subsidiaries, along with other manufacturers of prescription opioid medications, are the subject of lawsuits and have received subpoenas and other requests for information from various state
and local government agencies regarding the sale, marketing and/or distribution of prescription opioid medications. Numerous claims against opioid manufacturers have been and may continue to be filed by or on behalf of states, counties, cities,
Native American tribes, other government-related persons or entities, hospitals, health systems, unions, health and welfare funds, other third-party payers and/or individuals. In these cases, plaintiffs seek various remedies, including without
limitation, declaratory and/or injunctive relief; compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees, costs and/or other relief. In addition to direct expenditures for damages,
settlement and defense costs in connection with these claims, proceedings and investigations, there is a possibility of loss of revenues, injunctions and disruption of business. Furthermore, Endo and other manufacturers of prescription opioid
medications have been, and will likely continue to be, subject to negative publicity and press, which could harm its brand and the demand for its products. There are also regulatory and legislative proposals being made that could impact Endo and
other manufacturers of prescription opioid medications.
If Endo found liable in any lawsuits, including those related to sales, marketing or pricing practices, government investigations, product recalls or the sale, marketing and/or distribution of prescription opioid
medications, it could result in the imposition of damages, including punitive damages, substantial fines, significant reputational harm, civil lawsuits and criminal penalties, interruptions of business, modification of business practices, equitable
remedies and other sanctions against Endo or its personnel as well as significant legal and other costs. Endo may also voluntarily settle cases even if it believes that it has meritorious defenses because of the significant legal and other costs
that may be required to defend such actions. As a result, Endo may experience significant negative impacts on its operations. Any of the risks above could materially and adversely impact Endo’s business, financial condition, results of operations,
liquidity and cash flows.
If physicians do not prescribe XIAFLEX® or the medical profession or patients do not accept XIAFLEX®, our ability to grow or maintain revenues will be limited.
Our revenues are dependent on market acceptance of XIAFLEX®. Physician willingness to prescribe and patients’ willingness to accept, as well as the ultimate profitability of XIAFLEX® depend on many factors,
including:
Even though there is regulatory approval for XIAFLEX®, physicians may not prescribe, and patients may not accept, XIAFLEX® if Endo or its partners do not promote it effectively. If market acceptance of XIAFLEX®
falters or fails , Endo may not be able to continue market and sell XIAFLEX® successfully, which would limit our ability to receive revenue and could harm our business.
A condition for approval of XIAFLEX® for DC and for PD, Endo is required to comply with post-marketing requirements. Failure to comply with these requirements or any future
post-marketing requirements may harm our business.
The FDA can establish requirements for XIAFLEX® with which Endo must comply. Data from preclinical testing and clinical trials are submitted to the FDA in a BLA for marketing approval and to foreign government
health authorities in a marketing authorization application, consistent with each health authority’s specific regulatory requirements. The process of completing clinical trials for a new drug may take many years and require the expenditures of
substantial resources. As a condition of approval, the FDA or foreign regulatory authorities may require further studies, including Phase 4 post-marketing studies and pediatric studies, to provide additional data. In September 2007, Congress
passed legislation authorizing the FDA to require companies to undertake such studies to assess the risks of drugs known or signaling potential to have serious safety issues. For some drugs, the FDA may require a REMS, which could include
medication guides, physician communication plans, or restrictions on distribution and use, such as limitations on who may prescribe the drug or where it may be dispensed or administered. Other post-marketing studies could be used to gain approval
for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or foreign government regulatory authorities require post-marketing reporting to monitor the adverse
effects of drugs. Results of post-marketing programs may limit or expand the further marketing of the products. Failure to report or conduct the studies is considered a violation and can result in enforcement action. These studies or clinical
trials could be time-consuming and costly and the results could have negative effects on Endo’s ability to market the product.
Should FDA license a biosimilar product to XIAFLEX® we and/or Endo may face increased competition sooner than otherwise anticipated.
XIAFLEX® is regulated and marketed as biologic products pursuant to BLAs. XIAFLEX® is licensed based on a determination by the FDA of safety, purity, and potency as required under the PHSA. In 2010, Congress enacted
the BPCIA as part of the Patient Protection and Affordable Care Act, which amended the PHSA to create an abbreviated licensure pathway for products deemed to be biosimilar to or interchangeable with FDA-licensed reference biological products. Under
the BPCIA, an approval for a biosimilar product cannot be made effective by the FDA until 12 years after the original branded product was approved under a BLA. Certain changes, however, and supplements to an approved BLA, and subsequent
applications filed by the same sponsor, manufacturer, licensor, predecessor in interest, or other related entity do not qualify for the 12-year exclusivity period. Moreover, there have been efforts to decrease this period of exclusivity to a
shorter timeframe. Future proposed budgets, international trade agreements and other arrangements or proposals may affect periods of exclusivity.
Under the BPCIA, following the expiration of a 12-year reference exclusivity period, FDA may license a product under section 351(k) of the PHSA that it determines is biosimilar to or interchangeable with a reference
product licensed under section 351(a) of the PHSA. Biosimilarity is defined to mean that the section 351(k) product is highly similar to the reference product notwithstanding minor differences in clinically inactive components and that there are no
clinically meaningful differences between the section 351(k) product and the reference product in terms of the safety, purity, and potency of the product. To be considered interchangeable, a product must be biosimilar to the reference product, be
expected to produce the same clinical result as the reference product in any given patient, and, if administered more than once to an individual, the risks in terms of safety or diminished efficacy of alternating or switching between use of the
product and its reference product is not greater than the risk of using the reference product without such alternation or switch. Per FDA draft guidance, sponsors of biosimilar and interchangeable products are not required to seek FDA licensure for
all of the indications for which the reference product has approval, though interchangeable product sponsors are encouraged to do so.
Once any reference exclusivity period for a BLA-licensed biologics expires, FDA may make an approval under section 351(k) effective for another company’s BLA for a biosimilar or interchangeable version of our
product. Although licensure of a biosimilar or interchangeable under section 351(k) is generally expected to require less than the full complement of product-specific preclinical and clinical data required for innovator products licensed under
section 351(a), FDA has considerable discretion over the kind and amount of scientific evidence required to demonstrate biosimilarity and interchangeability.
The FDA could determine that XIAFLEX® does not have exclusivity protection under the BPCIA.
We believe that XIAFLEX®, which was initially approved in 2010, would have exclusivity protection under the BPCIA through 2022. However, there is a risk that the FDA will not consider our products to be reference a
product for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated. Additionally, this period of regulatory exclusivity does not apply to companies pursuing regulatory approval via their own
traditional BLA, rather than via the abbreviated pathway. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for
non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. It is possible that payers will give reimbursement preference to biosimilars even over reference biologics absent
a determination of interchangeability. Moreover, the FDA and Congress are taking steps to decrease drug prices and facilitate biosimilar development and approval. For instance, in 2019 FDA introduced a draft guidance to facilitate biologic
importation. Congress also passed a bill requiring sponsors of BLA approved products to provide sufficient quantities of biologic product on commercially reasonable market based terms to entities developing biosimilar products. Accordingly, we or
our partners may face biosimilar competition sooner than expected.
For XIAFLEX® for PD, Endo is required to implement a REMS. Failure to comply, or the cost of compliance with such REMS or other programs, may harm our business.
The FDA is authorized to require Endo as the sponsor of an approved or unapproved marketing application to submit a proposed REMS if the FDA determines that a REMS is necessary to ensure that the benefits of a drug
outweigh the risks of the drug. Failure to comply with the requirements of the approved REMS can render the drug misbranded. A violation of a REMS requirement is subject to civil penalties. Complying with the requirements of a REMS can be costly
and time-consuming and adversely affect Endo’s operations.
Because of the risks of corporal rupture (penile fracture) or other serious penile injury in the treatment of PD, XIAFLEX® is available only through the XIAFLEX® REMS Program. The required components of the XIAFLEX®
REMS Program include healthcare provider training and certification, healthcare provider risk education, certification of dispensing pharmacies and healthcare settings, dispenser confirmation that the prescribing physician is certified under the
REMS, Endo auditing of certified pharmacies and healthcare settings, and patient risk education. Because REMS can be burdensome and costly for sponsors to implement, and burdensome for healthcare providers, patients, and dispensers to follow, a
REMS, such as the one for XIAFLEX®, can materially limit a product’s commercial prospects.
If we are unable to obtain opt-in, milestone, mark-up on cost of goods sold and royalty payments from Endo or meet our needs for additional funding from other sources, we may be
required to limit, scale back or cease our operations.
Our business strategy contains elements that we will not be able to implement if we do not receive the anticipated opt-in, milestone, royalty or mark-up on cost of goods sold payments from Endo, or secure additional
funding from other sources. While we anticipate being profitable on an ongoing, annual basis, our future funding requirements will depend on many factors, including:
These factors could result in variations from our currently projected operating requirements. If our existing resources are insufficient to satisfy our operating requirements, we may need to limit, scale back or
cease operations or, in the alternative, borrow money. Given our operations and history, we may not be able to borrow money on commercially reasonable terms, if at all. If we issue any equity or debt securities, the terms of such issuance may not
be acceptable to us and would likely result in substantial dilution of our stockholders’ investment. If we do not receive revenues from Endo, and are unable to secure additional financing, we may be required to cease operations.
We depend on Endo for the determination of royalty payments and cost of goods sold. While we have rights to audit Endo, the independent auditors may have difficulty determining
the correct royalty and cost of goods sold calculations, we may not be able to detect errors and payment calculations may call for retroactive adjustments. We may have to exercise legal remedies to resolve any disputes resulting from the audit.
The royalty payments we receive are determined by Endo based on reported sales. Endo’s calculation of the royalty payments is subject to and dependent upon the adequacy and accuracy of its sales and accounting
functions. Endo’s calculation of cost of goods sold are subject to and dependent upon the adequacy and accuracy of its internal accounting of costs. Errors may occur from time to time in these calculations. The License Agreement provides us the
right to audit the calculations and sales data for the associated royalty payments. Although we may exercise our audit rights, such audits may occur many months following our recognition of the royalty revenue, may require us to adjust our royalty
revenues in later periods and may require expense on the part of the Company. Further, Endo may be uncooperative or have insufficient records, which may complicate and delay the audit process. Although we may exercise our audit rights, we rely in
the first instance on Endo to accurately report sales and calculate and pay applicable royalties. Such audits may occur many months following our recognition of the royalty revenue, may require us to adjust our royalty revenues in later periods and
may require expense on the part of the Company. We also rely on Endo’s cooperation and maintenance of sufficient records in performing such audits. If Endo is uncooperative or has insufficient records, it may complicate and delay the audit
process. In the absence of such cooperation, we may be forced to exercise legal remedies to enforce our rights.
Our royalty revenue recognition is dependent upon the receipt of preliminary data from Endo.
We receive royalty revenues on net sales under our License Agreement with Endo. These are presented in “Royalties” in our consolidated statements of income. In accordance with Accounting Standards Codification
(“ASC”) Topic 606, “Revenue from Contracts with Customers,” we record these revenues based on estimates of the net sales that occurred during the relevant period. The relevant period estimates of these royalties are based on preliminary data
provided by Endo and analysis of historical gross-to-net deductions, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become
known, typically the following quarter. While Endo is required (pursuant to the terms of the Second Amendment to the License Agreement) to provide us with timely estimates of royalties in order to assist us in complying with our financial
reporting obligations, there is no guarantee that they will do so in a timely fashion, or at all.
In order to finance and to secure the rights to conduct clinical trials for products we have licensed to Endo, we have granted to third parties significant rights to share in
royalty payments received by us and, in some case, milestone payments to be received by us.
To finance and secure the rights to conduct clinical trials for products we have licensed to Endo, we have granted to third parties certain rights to share in royalty payments and, in some cases milestone payments,
received by us from Endo under the License Agreement. Consequently, we will be required to share a significant portion of the payments due to us from Endo under the Agreement.
If we breach our agreements with third parties or if there is a dispute concerning any of our agreements with third parties, our business could be materially harmed.
Our agreements with third parties impose on us various obligations, such as those related to intellectual property rights, non-competition, and development of products, as described throughout Item 1 of this Report.
If we fail to comply with such obligations, or a counterparty to our agreements believes that we have failed to comply with such obligations, we may be sued and the costs of the resulting litigation could materially harm our business. Additionally,
disputes may arise under these agreements, including with respect to the interpretation of such agreements and fee redeterminations or renegotiations thereof. These disputes may lead to litigation, termination of the agreement, or amendments that
change our rights under the agreement, which could materially affect our financial position and materially harm our business. We agreed, for example, to resolve a dispute with Endo, to grant Endo an early opt-in to indications which may, if we
consent, limit our ability to conduct clinical trials pursuant to the First Amendment which is described more fully in Item 1 above.
Our results of operations and financial position could be negatively impacted if our tax positions are challenged by tax authorities.
We are a U.S.-based company subject to taxes in certain U.S. jurisdictions. U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. Although we believe
that our tax estimates and tax positions are reasonable, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. If we are unsuccessful in such a
challenge, the relevant tax authorities may assess additional taxes, which could result in adjustments to, or impact the timing or amount of, taxable income, deductions or other tax allocations, which may adversely affect our results of operations
and financial position.
Risks Related to Clinical Trials and Development of Drug Candidates
Our ability to conduct future clinical trials and develop products for injectable administration of collagenase may be limited by the License Agreement.
Under the License Agreement, we have the right to conduct trials, studies or development work for uterine fibroids, and, upon approval by the parties’ joint development committee (the “JDC”), additional indications.
Endo will need to approve our protocol for further clinical trials with uterine fibroids. In addition, the JDC has the right to stop our study or trial in uterine fibroids if the rate of serious adverse events exceeds certain thresholds. If the JDC
fails to approve our protocol for uterine fibroids or if the JDC stops our studies or trials in uterine fibroids due to safety concerns, our ability to obtain milestones and royalty payments with respect to this indication would be limited. We may
only conduct in vivo trials, studies or development work for additional indications beyond the pre-approved indications upon submission to and approval by the JDC of our development plan.
Additionally, under the License Agreement, we have licensed or granted options to certain of our rights to conduct clinical trials and develop products for injectable administration of collagenase. We agreed, for
example, to certain non-competition provisions, which may limit our clinical development activities.
We are dependent on Endo for access to XIAFLEX®, which may limit our ability to conduct future clinical trials and to obtain the associated opt-in, milestone, mark-up on cost of
goods sold payments and royalty payments under the License Agreement.
Under the License Agreement, we have agreed to buy at cost plus a mark-up XIAFLEX® from Endo for conducting our trials, studies and development work. If Endo does not supply XIAFLEX® to us, or supply XIAFLEX® that
meets regulatory qualify standards, our ability to conduct clinical trials using XIAFLEX® would be limited because we do not have the right to make XIAFLEX® or to purchase it from third parties. Similarly, any interruptions in Endo’s manufacturing
as a result of regulatory issues or noncompliance would limit our ability to conduct our trials. We may also be held responsible for any Endo departures from the applicable regulatory manufacturing requirements, to the extent it impacts our
clinical supply. Moreover, our ability to use our own clinical material may be limited both by lack of availability and by certain potential regulatory restrictions.
If clinical trials for our potential new indications are delayed, we may not be able to obtain opt-in, milestone or royalty payments under the License Agreement for new
indications. The regulatory approval of such new indications would also be delayed or may never be received.
Clinical trials that we, Endo, or our or their investigators may conduct may not begin on time or may need to be restructured or temporarily suspended after they have begun. Flaws in a clinical trial’s design or
conduct, may also not become apparent until the clinical trial is underway or complete, which may prevent regulatory approval, or require that clinical trials be modified or repeated. Clinical trials may be delayed, may never be completed or may
need to be restructured for a variety of reasons, including delays, impediments or restructuring related to:
Completion of clinical trials for each indication is required before commercialization. If we or Endo experience delays in, or termination of, clinical trials, or fails to enroll patients in clinical trials in a
timely manner, or if the cost or timing of the regulatory approval process increases, our financial results and the commercial prospects for product candidates for new indications will be adversely impacted. Significant delays relating to
development programs also could shorten any periods during which we or our partners may have the exclusive right to commercialize a product or allow competitors to bring products to market before we or our partners, potentially blocking our or our
partner’s ability to receive marketing approval. In addition, many of the factors that cause, or lead to, delays in clinical trials may ultimately lead to the denial of marketing approval.
The process of conducting clinical trials and developing product candidates involves a high degree of risk, may take several years, and may ultimately not be successful.
Product candidates that appear promising in the early phases of development may fail to reach the market for several reasons, including:
Success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or
prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Any
changes to the U.S. regulatory approval process could significantly increase the timing or cost of regulatory approval for product candidates making further development uneconomical or impossible. In addition, once Endo exercises its opt-in with
respect to an additional indication, further clinical trials, development, manufacturing, marketing and selling of such product are out of our control. Our interest is limited to receiving opt-in, milestone, mark-up on cost of goods sold payments
and royalty payments.
Successful development of drug candidates is inherently difficult and uncertain, and our long-term prospects depend upon our ability and the ability of our partners,
particularly with respect to XIAFLEX®, to continue to successfully commercialize these drug candidates.
Successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if we are
able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX®, to continue to successfully commercialize these drug
candidates.
There is significant uncertainty regarding our and our partners’ ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:
Even if we or our partners were to obtain approval, regulatory authorities may approve product candidates for fewer or more limited indications, populations, or uses, product candidates may contain significant safety
warnings, including black box warnings, contraindications, and precautions, regulatory authorities may grant approval contingent on the performance of costly post-marketing clinical trials, surveillance, or other requirements, including REMS to
monitor the safety or efficacy of the product, or regulatory authorities may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate.
Any of these scenarios could compromise the product candidate’s commercial prospects.
Risks Related to Regulatory Requirements
We are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.
Conducting clinical trials for human drugs and, in certain circumstances, veterinarian trials for animal drugs, and the testing, development and manufacturing and distribution of product candidates are subject to
regulation by numerous governmental authorities in the U.S. and other jurisdictions, if we desire to export the resulting products to such other jurisdictions. These regulations govern or affect the testing, manufacture, safety, labeling, storage,
record-keeping, approval, distribution, advertising and promotion of product candidates, as well as safe working conditions. Even after a product candidate has been approved, the FDA and comparable governmental authorities subject such product to
continuing review and regulatory requirements including, for example, requiring the conducting and reporting of the results of certain clinical studies or trials and commitments to voluntarily conduct additional clinical trials. Noncompliance with
any applicable regulatory requirements can result in warning, untitled, or cyber letters, suspensions or withdrawals of approvals or clearances, refusals to approve pending applications or supplements, seizures or recalls of products, injunctions
against or other restrictions on the manufacture, holding, distribution, marketing and sale of a product, import or export refusals, product detention, promotional piece modifications and the issuance of corrective information, adverse publicity,
regulatory authority issuance of public communications regarding products, holds or terminations on pre- or post-market studies, liability for harm cause to patients, reputational harm, civil and criminal sanctions, and FDA debarment, suspension
and debarment from government contracts, and refusal of orders under existing government contracts, exclusion from federal healthcare programs, consent decrees, or corporate integrity agreements, among other consequences. In addition, regulatory
approval could impose limitations on the indicated or intended uses for which product candidates may be marketed, and impose post-approval requirements. The REMS program is no longer an FDA requirement for DC only. With respect to its approval of
XIAFLEX® for PD, Auxilium, and now Endo, has further collaborated with the FDA for a REMS for XIAFLEX® for the treatment of PD in men with a palpable plaque and curvature deformity of 30 degrees or greater at the start of therapy. The required
components of the XIAFLEX® REMS Program include healthcare provider training and certification, healthcare provider risk education, certification of dispensing pharmacies and healthcare settings, dispenser confirmation that the prescribing
physician is certified under the REMS, Endo auditing of certified pharmacies and healthcare settings, and patient risk education.
Currently, there is a substantial amount of congressional and administrative review of the FDA and the regulatory approval process for drug candidates in the U.S. As a result, there may be significant changes made to
the regulatory approval process in the U.S. In addition, the regulatory requirements relating to the development, manufacturing, testing, promotion, marketing and distribution of product candidates may change in the U.S. Such changes may increase
our costs and adversely affect our operations.
Failure to comply with, or changes to applicable regulatory requirements may result in a variety of consequences, including the following:
To the extent that we or our partners do not perform particular regulated functions ourselves but contract out to third parties, including contract manufacturers, contract research organizations, clinical trial
sites, and laboratories, we or our partners may be held responsible for such third parties’ failure to follow the applicable regulatory requirements.
Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable laws and regulations and we have incurred and will continue to incur
costs relating to compliance with applicable laws and regulations.
As a biopharmaceutical company, we are subject to a large body of legal and regulatory requirements. In addition, as a publicly-traded company we are subject to significant regulations, including the Sarbanes-Oxley
Act of 2002 (“SOX”), some of which have only recently been revised or adopted. We cannot assure you that we are or will be in compliance with all potentially applicable laws and regulations. Failure to comply with all potentially applicable laws
and regulations could lead to the imposition of fines, cause the value of our common stock to decline, and impede our ability to raise capital or list our securities on certain securities exchanges. New rules could make it more difficult or
costlier for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.
The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our committees and as executive officers. We cannot predict or estimate the amount of the additional costs we may
incur or the timing of such costs to comply with these rules and regulations.
We may fail to maintain effective internal controls over external financial reporting or such controls may fail or be circumvented.
SOX requires us to report annually on our internal controls over financial reporting, and our business and financial results could be adversely affected if we, or our independent registered public accounting firm,
determine that these controls are not effective. In addition, any failure or circumvention of our internal controls and procedures or failure to comply with regulations concerning controls and procedures could have a material effect on our
business, results of operation and financial condition. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our committees and as executive officers.
Risks Related to Our Industry and Growth
Adverse events or lack of efficacy in clinical trials may force us and/or our partners upon whom we are wholly dependent to stop development of our product candidates or prevent
regulatory approval of our product candidates or significant safety issues could arise after regulatory approval of our products, any of which could materially harm our business.
The prescribing information for XIAFLEX® contains a Boxed Warning regarding penile fracture (corporal rupture) and other serious injuries to the penis, such as hematoma. The Boxed Warning also advises prescribers
that, for PD, XIAFLEX® is only available through a REMS program. XIAFLEX® is contraindicated in Peyronie’s plaques that involve the penile urethra and in patients with a history of hypersensitivity to XIAFLEX® or to collagenase used in other
therapeutic applications. The XIAFLEX® FDA approved label also contains certain warnings and precautions, including “tendon ruptures or serious injury to the injected finger/hand,” “corporal rupture (penile fracture) and other serious injury to
the penis,” “hypersensitivity reactions, including anaphylaxis,” and with respect to use in patients with abnormal coagulation. Per the FDA approved label, the most common adverse reactions reported in ≥ 25% of patients treated with XIAFLEX® for
DC and at an incidence greater than placebo were edema peripheral (e.g., swelling of the injected hand), contusion, injection site hemorrhage, injection site reaction, and pain in the injected extremity. The most frequently reported adverse drug
reactions in ≥ 25% of patients treated with XIAFLEX® for PD and at an incidence greater than placebo were penile hematoma, penile swelling and penile pain. Additional safety information is also included in the XIAFLEX® FDA approved label.
Adverse events or lack of efficacy may force us to stop development of our product candidates or prevent or limit regulatory approval of our product candidates, which could materially harm our business. In addition,
any adverse events or lack of efficacy may force Endo to stop development of the products we have licensed to it or prevent or limit regulatory approval of such products, which could materially impair all or a material part of the future revenue we
hope to receive from Endo. Even if our product candidates receive regulatory approval, new safety issues may be reported and we or our partners may be required to amend the conditions of use for a product and may make it difficult to obtain product
liability insurance for clinical trials. New safety issues following approval may also result in regulatory action, such as withdrawal of product approval, refusal to approve new product indications or similar products, holds or suspension of
clinical studies, labeling restrictions, product recalls, changes in the way that the product is administered, produced or distributed, adverse publicity, public statements by regulators, post-approval study or REMS requirements, liability for harm
cause to patients, or the product becoming less competitive, among other consequences.
We and our licensees face competition in our product development and marketing efforts from pharmaceutical and biotechnology companies, universities and other not-for-profit
institutions.
We and our licensees face competition in our product development and marketing efforts from entities that have substantially greater research and product development capabilities and greater financial, scientific,
marketing and human resources. These entities include pharmaceutical and biotechnology companies, as well as universities and not-for-profit institutions. Our and our licensees’ competitors may succeed in developing products or intellectual
property earlier than we or our licensees do, entering into successful collaborations before us or our licensees, obtaining approvals from the FDA or other regulatory agencies for such products before us or our licensees, or developing or marketing
products that are more effective than those we or our licensees could develop or market. The success of any one competitor in these or other respects will have a material adverse effect on our business, our ability to receive opt-in payments from
Endo or our ability to generate revenues from third-party arrangements with respect to additional indications for which Endo does not exercise its opt-in.
We may face financial pressures because of our lack of diversity in our research and product development.
All of our income is derived from products marketed by Endo and Endo has the right under the License Agreement to opt-in to all work we do in the Field (as defined in the License Agreement). Therefore, with respect
to those products for which Endo opts-in, our upside is limited by the License Agreement. For example, Endo may opt-in to an indication and then choose not to pursue vigorously the development of that indication which may result in us negotiating
with Endo for repurchase rights to the indication. In order to eliminate this financial pressure and diversify our portfolio, we may choose to acquire or in-license non-collagenase opportunities.
Our strategy of generating growth through acquisitions and in-licensing deals may not be successful.
Because of limits in the License Agreement, our business strategy may include growing our business through acquisition and in-licensing transactions. We may not be successful in identifying, effectively evaluating,
acquiring or in-licensing, and developing and commercializing additional products on favorable terms, or at all. Competition for attractive product opportunities is intense and may require us to devote substantial resources, both managerial and
financial, to an acquisition or in-licensing opportunity.
Acquisition and in-licensing efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote significant resources to
potential deals that are never completed. Even if we are successful in acquiring a product or company or obtaining licensing terms favorable to us, it may not result in a successfully developed or commercialized product or, even if an acquired
product is commercialized, competing products or technologies could render a product noncompetitive, uneconomical or obsolete. There may be risks associated with an acquired or in-licensed asset which may expose us to regulatory or legal action or
which may prevent us from ultimately receiving approval for or successfully commercializing the product. Moreover, the cost of acquiring other companies or in-licensing products could be substantial. If we are unsuccessful in our efforts to
acquire other companies or in-license and develop additional products, or if we acquire or in-license unproductive assets, it could have a material adverse effect on the growth of our business.
We may face pressure from activist stockholders to declare dividends which may negatively affect our business.
Campaigns by stockholders to effect changes at publicly-listed companies are sometimes led by investors seeking to increase short-term stockholder value by advocating corporate actions including special dividends. We
have a substantial amount of cash reserves. Given our stockholder composition and other factors, it is possible such stockholder or future activist stockholders may attempt to effect a distribution of this cash. Responding to actions by such
activist stockholders or others in the future would be costly and time-consuming, disrupt our operations and divert the attention of our Board and senior management from the pursuit of business strategies, including new collagenase or
non-collagenase opportunities, acquisitions or in-licenses of other indications or technologies, which could adversely affect our results of operations and financial condition. Furthermore, if faced with actions by activist stockholders, we may not
be able to respond effectively to such actions, which could be disruptive to our business.
If product liability lawsuits are brought against us or our partners, we may incur substantial liabilities.
Our business exposes us to potential liability risks that arise from the clinical testing and, if approved, the commercialization of our and our partners’ products. We continue to have product liability exposure for
topical products sold by us prior to the sale of our topical business. In addition to direct expenditures for damages, settlement and defense costs, there is a possibility of adverse publicity and loss of revenues as a result of product liability
claims. Product liability claims can also result in regulatory consequences, such as the withdrawal of clinical trial participants, termination of clinical trials or programs, governmental authority investigations and enforcement actions, product
recalls and withdrawals of approval, as well as labeling revisions. Product liability is a significant commercial risk for us. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon
claims for injuries allegedly caused by the use of their products. In addition, in the age of social media, plaintiffs’ counsel now has a wide variety of tools to advertise their services and solicit new clients for litigation. Thus, any
significant product liability litigation or mass tort in which we are a defendant may have a larger number of plaintiffs than such actions have seen historically because of the increasing use of widespread and media-varied advertising.
In addition, under the License Agreement, we are obligated to indemnify Endo and its affiliates for any harm or losses they suffer relating to any personal injury and other product liability resulting from our
development, manufacture or commercialization of any injectable collagenase product. We have clinical trial and product liability insurance in the aggregate amount of $5.0 million dollars. We believe this is adequate in both scope and amount and
has been placed with what we believe are reputable insurers. However, we may not be able to maintain our clinical trial and product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against
potential claims or losses. If losses from product liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources, and our business and results of operations may be harmed. Whether or not we
are ultimately successful in product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of which could impair our business
In addition, it may be necessary for us to recall or withdraw, either voluntarily or mandatorily, products that do not meet approved specifications or which subsequent data demonstrate may be unsafe or ineffective,
which would also result in adverse publicity as well as in costs connected to the recall and loss of revenue.
Risks Related to Personnel
The loss of key personnel, including our principal executive officer and principal financial officer, could delay or prevent us from achieving our objectives.
Our business efforts could be affected adversely by the loss of one or more key members of our personnel, particularly J. Kevin Buchi, our principal executive officer, and Patrick Hutchison, our principal financial
officer, Mr. Buchi and Mr. Hutchison were only recently elevated to their respective positions following the chief executive officer search as a result of the death of our President, Mr. Wegman. We currently do not have key person insurance on any
of our employees or key personnel.
Because we are a small biopharmaceutical-focused company with limited resources, we may be unable to attract and retain qualified personnel; the termination of relationships
with key management, consulting and scientific personnel or the inability to recruit and retain additional personnel could prevent us from developing our technologies, conducting clinical trials and/or obtaining financing.
We are a small company and we rely heavily on third parties and outside consultants to conduct many important functions. As of December 31, 2019, we had seven full-time employees and two independent consultants. We
may require additional experienced executive, accounting, legal, administrative and other personnel from time to time in the future. Also, because of the specialized scientific nature of our business, our ability to develop products and to compete
with our current and future competitors largely depends upon our ability to attract, retain and motivate highly-qualified managerial, consulting and scientific personnel. If we are unable to retain the services of one or more of the principal
members of senior management, consultants or other key employees, our ability to implement our business strategy could be materially harmed. We face intense competition for qualified employees and consultants from biopharmaceutical companies,
research organizations and academic institutions. Attracting, retaining or replacing these personnel on acceptable terms may be difficult and time-consuming given the high demand in our industry for similar personnel. There is intense competition
for qualified personnel in the areas of our activities, and we cannot assure you that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business.
Risks Related to Intellectual Property Rights
If we are unable to obtain, maintain and enforce intellectual property protection covering our products, others may be able to make, use or sell products substantially similar
to ours, which could adversely affect our ability to compete in the market.
Our commercial success depends, in part, on our ability to obtain, maintain and enforce patents, trade secrets, trademarks and other intellectual property rights and to operate without having third parties infringe,
misappropriate or circumvent the rights that we own or license. If we are unable to obtain, maintain and enforce intellectual property protection covering our products, others may be able to make, use or sell products that are substantially similar
to ours without incurring the sizeable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market. Our ability to stop third parties from making, using, selling, offering to sell or
importing our product candidates is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. However, the patent positions of biopharmaceutical companies, including ours,
can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Therefore, there is no assurance that our pending patent applications will result in the issuance of patents or that we
will develop additional proprietary products which are patentable. Moreover, patents issued or to be issued to us may not provide us with any competitive advantage. Our patent position is subject to numerous additional risks, including the
following:
Any of these factors could hurt our ability to gain full patent protection for our products. Registered trademarks and trademark applications in the U.S. and other countries are subject to similar risks as described
above for patents and patent applications.
Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO, or become involved in opposition, nullity, derivation, reexamination, inter partes review, post-grant review or
interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to
commercialize our technology or drugs and compete directly with us, without payment to us or result in our inability to manufacture or commercialize drugs without infringing third-party patent rights. In addition, if the breadth or strength of
protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to seek patent protection or to license, develop or commercialize current or future product candidates.
Developments in patent law could have a negative impact on our business.
From time to time, the United States Supreme Court (the “Supreme Court”), other federal courts, the United States Congress, or the USPTO, may change the standards of patentability and any such changes could have a
negative impact on our business.
Two cases involving diagnostic method claims and “gene patents” have been decided by the Supreme Court. On March 20, 2012, the Supreme Court issued a decision in Mayo Collaborative
v. Prometheus Laboratories (“Prometheus”), a case involving patent claims directed to optimizing the amount of drug administered to a specific patient. According to that decision, Prometheus’ claims failed to incorporate sufficient
inventive content above and beyond mere underlying natural correlations to allow the claimed processes to qualify as patent-eligible processes that apply natural laws. On June 13, 2013, the Supreme Court subsequently decided Association for Molecular Pathology v. Myriad Genetics (“Myriad’), a case brought by multiple plaintiffs challenging the validity of patent claims held by Myriad Genetics, Inc. relating to the breast cancer
susceptibility genes BRCA1 and BRCA2, holding that genomic DNA that exists in nature, even if isolated, such as the DNA constituting the BRCA1 and BRCA2 genes, is not patentable subject matter under 35 U.S.C. §101.
On March 4, 2014, the USPTO issued a memorandum to patent examiners providing guidance for examining claims reciting laws of nature/natural principles, natural phenomena, and/or natural products for patent
eligibility in view of the Supreme Court decisions in Prometheus and Myriad. The guidance indicates that claims reciting such natural products, even in combination, that do not significantly differ from such natural products could be rejected as
directed to non-statutory subject matter. That guidance was replaced by a memorandum issued December 15, 2014, that modified some of the earlier guidance, but a number of the aspects have not substantially changed, and it is too soon to determine
how the revised guidance will be applied. These guidelines, and the Myriad discussion that isolation of natural products may not confer eligibility under 35 U.S.C. §101, are relevant to our patent portfolio and thus enforcement of these patents.
A further case relevant to these issues was decided by the Supreme Court on June 19, 2014, in Alice Corp. v. CLS Bank International, 573 U.S. 208, 134 S. Ct. 2347 (2014)
(“Alice”). While the Alice case related to computer-implemented inventions, the holding in that case, which also related to natural laws or “abstract ideas” has been used to reject claims in applications directed to other technologies. As a result
of the Alice case, the March guidance issued by the USPTO was replaced by the memorandum issued December 15, 2014, that modified some of the earlier guidance. In June of 2015, an additional case was decided by the Federal Circuit, namely, Ariosa Diagnostics, Inc. v. Sequenom, Inc., 788 F.3d 1371 (Fed. Cir. 2015) (“Sequenom”). The Federal Circuit affirmed the district court, finding that methods of detecting paternally inherited nucleic acids were
not patent eligible. Sequenom’s petition for rehearing en banc and its petition for certiorari to the Supreme Court were both denied.
On July 30, 2015, the USPTO issued a “July 2015 Update on Subject Matter Eligibility,” which provided further guidance, as well as examples of patent-eligible and patent-ineligible subject matter, which was largely
directed to computer-implemented inventions. However, in May of 2016, the USPTO issued an additional “Subject Matter Eligibility Update,” as well as “Subject Matter Eligibility Examples: Life Sciences,” which included examples of eligible and
non-eligible claims relating to vaccines, diagnosis and treatment of disease, dietary sweeteners, screening for gene alterations, a paper-making machine, and a process for hydrolysis of fat. Additional business method examples were issued in
December of 2016. These examples are useful guidance for drafting eligible claims in the chemical and biological arts. In addition, the USPTO provided an additional memorandum in November of 2016, summarizing more recent decisions by the Federal
Circuit in the area of software claim eligibility.
In 2018, the USPTO provided additional guidance by issuing charts and Quick Reference Sheets (March 14, 2018 and May 3, 2018) that list various subject matter eligibility decisions, including those identifying
abstract ideas; memoranda on various subject matter eligibility decisions (April 2, 2018 Finjan Inc. v. Blue Coat Systems, Inc., 879 F.3d 1299 (Fed. Cir. 2018) and Core
Wireless Licensing S.A.R.L., v. LG Electronics, Inc., 880 F.3d 1356 (Fed. Cir. 2018), April 19, 2018 Berkheimer v. HP Inc., 881F.3d 1360 (Fed. Cir. 2018) and Aatrix
Software, Inc. v. Green Shades Software, Inc., 882 F.3d 1121 (Fed. Cir. 2018), June 7, 2018 Vanda Pharmaceuticals Inc. v. West-Ward Pharmaceuticals, 887 F.3d 1117 (Fed. Cir. 2018); and training
materials on what constitutes a “well-understood, routine, conventional activity” (May 7, 2018). In addition, the Manual of Patent Examining Procedure was amended in 2018 (Chapter 2106) to incorporate this information.
On January 7, 2019, along with providing additional Examples 37-42, the USPTO issued its “2019 Revised Patent Subject Matter Eligibility Guidance” (“Guidance”) in an effort to provide more consistency and
predictability in the analysis of whether subject matter is patent eligible under 35 U.S.C. § 101. 84 Fed. Reg. 50. This Guidance made changes to what is recognized as Step 2A of the eligibility test, to include a “Prong One” that provides
grouping of abstract idea exceptions, and a “Prong Two,” that requires an examiner to “evaluate whether the claim as a whole integrates the recited judicial exception into a practical application of the exception.” Updated Guidance in October of
2019 further clarified the eligibility test. However, the Federal Circuit has held that they are not obliged to follow the USPTO guidance. See, Cleveland Clinic Foundation v. True Health Diagnostics, LLC, 859
F.3d 1352 (Fed. Cir. 2017), cert. denied, 138 S. Ct. 2621 (2018) and ChargePoint, Inc. v. SemaConnect, Inc. 920 F.3d 759 (Fed. Cir. 2019), cert. denied, 2020 WL 411896 (U.S. Jan. 27, 2020) (No. 19-521). The Senate Judiciary Subcommittee on Intellectual Property has held hearings on proposed legislation to deal with the § 101 uncertainty, but the fate of such legislative fixes is uncertain. In addition, the
Supreme Court has recently denied certiorari in the appeal of Athena Diagnostics, Inc. v. Mayo Collaborative Servs., LLC, 915 F.3d 743 (Fed. Cir.
2019), cert. denied, 2020 WL 129579 (U.S. Jan. 13, 2020) (No. 19-430), as well as at least seven other appeals, which many practitioners believed would clarify the situation.
In light of the developing case law and guidance from the USPTO on subject matter eligibility, we cannot assure you that our efforts to seek patent protection for our technology and products will not be negatively
impacted by the guidance issued by the USPTO, the decisions described above, rulings in other cases, or changes in guidance or procedures issued by the USPTO, or changes in statutes implemented by Congress.
Furthermore, we cannot fully predict what impact the Supreme Court’s decisions in Prometheus, Myriad, Alice and subsequent cases may
have on the ability of biopharmaceutical companies or other entities to obtain or enforce patents relating to purified natural products in the future. The Prometheus, Myriad and Alice decisions are relatively recent, and the contours of when claims to laws of nature, natural phenomena or natural products meet the patent eligibility requirements are not clear and may take many years to develop via
interpretation in the courts. Thus, we may not be able to defend successfully the validity of our patents if challenged.
In addition, the Leahy-Smith America Invents Act (the “America Invents Act”), which was signed into law in 2011, included a number of significant changes to U.S. patent law. These changes include a transition from a
“first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged, and changes to the way patent applications are disputed during the examination process. These changes may favor larger and more established
companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed new regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes
to patent law associated with the America Invents Act. Ongoing substantive changes to patent law associated with the America Invents Act may affect our ability to obtain patents, and, if obtained, to enforce or defend them. Accordingly, it is not
clear what, if any, impact the America Invents Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend any patents that may issue from
our patent applications, all of which could have a material adverse effect on our business.
The laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. or vice-versa. For example, European patent law restricts the patentability of methods of treatment of the human
body more than U.S. law. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and utility, or equivalent, patent applications in the U.S. and other jurisdictions are typically not published until 18
months after the filing date of such patent applications, or in some cases, not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent
applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent
applications may not result in patents being issued that protect our product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies and drugs. Changes in either the patent laws or
interpretation of the patent laws in the U.S. and other countries may diminish the value of our patents or narrow the scope of our patent protection.
If we breach any of the agreements under which we license rights to products or technology from others, we could lose license rights that are critical to our business and our
business could be harmed.
We are a party to a number of license agreements by which we have acquired rights to use the intellectual property of third parties that are necessary for us to operate our business. If a third party terminates its
agreement, whether by its terms or due to our breach, our right to use such third party’s intellectual property may negatively affect our licenses to Endo, and, in turn, their obligation to make opt-in, milestone, mark-up on cost of goods sold,
royalty or other payments to us.
Our ability and the ability of our licensees and collaborators to develop and license products based on our patents may be impaired by the intellectual property of third
parties.
Endo’s and our commercial success in developing and manufacturing collagenase products is partially dependent on the products not infringing the patents or proprietary rights of third parties. While we currently
believe that we and our licensees and collaborators have freedom to operate in the collagenase market, others may challenge that position in the future. There has been, and we believe that there will continue to be, significant litigation in the
pharmaceutical industry regarding patent and other intellectual property rights.
Third parties could bring legal actions against us, our licensees, licensors or collaborators claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or products.
A third party might request a court to rule that the patents we in-licensed or licensed to others, or those we may in-license in the future, are invalid or unenforceable. In such a case, even if the validity or enforceability of those patents were
upheld, a court might hold that the third party’s actions do not infringe the patent we license to others, which could, in effect, limit the scope of our patent rights and those of our licensees or collaborators.
Our agreement with Endo requires us to indemnify them against any claims for infringement based on the use of our technology. If we become involved in any litigation, it could consume a substantial portion of our
resources, regardless of the outcome of the litigation. If Endo becomes involved in such litigation, it could also consume a substantial portion of their resources, regardless of the outcome of the litigation, thereby jeopardizing their ability to
commercialize candidate products and/or their ability to make opt-in, milestone, mark-up on cost of goods sold or royalty payments to us. If any of these actions are successful, in addition to any potential liability for damages, we could be
required to obtain a license to permit ourselves and our licensees, licensors or collaborators to conduct clinical trials, manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant
cross-licenses to our patents. However, there can be no assurance that any such license will be available on commercially acceptable terms or at all. Ultimately, we and our licensees or collaborators could be prevented from commercializing a
product, or forced to cease some aspect of their or our business, as a result of patent infringement claims, which could harm our business or right to receive opt-in, milestone, markup on cost of goods sold and royalty payments.
Our intellectual property may be infringed by a third party.
Third parties may infringe one or more of our issued patents or trademarks. We cannot predict if, when or where a third party may infringe one or more of our issued patents or trademarks. To counter infringement, we
may be required to file infringement claims, which can be expensive and time-consuming. Moreover, there is no assurance that we would be successful in a court of law in proving that a third party is infringing one or more of our issued patents or
trademarks. Any claims we assert against perceived infringers could also provoke these parties to assert counterclaims against us, alleging that we infringe their intellectual property. In addition, in a patent infringement proceeding, a court may
decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly and/or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the
technology in question, any of which may adversely affect our business. Even if we are successful in proving in a court of law that a third party is infringing one or more of our issued patents or trademarks there can be no assurance that we would
be successful in halting their infringing activities, for example, through a permanent injunction, or that we would be fully or even partially financially compensated for any harm to our business. We may be forced to enter into a license or other
agreement with the infringing third party at terms less profitable or otherwise commercially acceptable to us than if the license or agreement were negotiated under conditions between those of a willing licensee and a willing licensor.
Additionally, we may not become aware of a third-party infringer within legal timeframes for compensation or at all, thereby possibly losing the ability to be compensated for any harm to our business. Such a third
party may be operating in a foreign country where the infringer is difficult to locate and/or the intellectual property laws may be more difficult to enforce. Some third-party infringers may be able to sustain the costs of complex infringement
litigation more effectively than we can because they have substantially greater resources. Any inability to stop third-party infringement could result in loss in market share of some of our products or even lead to a delay, reduction and/or
inhibition of the development, manufacture or sale of certain products by us. There is no assurance that a product produced and sold by a third-party infringer would meet our or other regulatory standards or would be safe for use. Such third‑party
infringer products could irreparably harm the reputation of our products thereby resulting in substantial loss in market share and profits.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
We employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that the we or our employees, consultants or independent contractors have
inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our
patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we do not prevail, we could be required to pay substantial damages and could lose rights to important
intellectual property. Even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.
Risks Related to our Common Stock
We have no current plan to pay dividends on our common stock and investors must rely on an increase in stock price for any return on their investment.
We retain the earnings that we generate. Currently, we do not have any plans to pay dividends on our common stock. Because we historically have not declared dividends, stockholders must rely on an increase in the
stock price for any return on their investment in us. Investors will not receive any funds absent a sale of their shares. We cannot assure investors of a positive return on their investment when they sell their shares.
Our stock price has, in the past, been volatile, and the market price of our common stock may drop below the current price.
Our stock price has, at times, been volatile. Currently, our common stock is traded on The Nasdaq Global Market (“Nasdaq”), and is thinly traded.
Market prices for securities of pharmaceutical, biotechnology and specialty pharmaceutical companies have been particularly volatile. Some of the factors that may cause the market price of our common stock to
fluctuate include:
If any of these risks occurs, or continues to occur, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to
management.
We cannot guarantee that we will repurchase our common stock pursuant to our stock repurchase program or that our stock repurchase program will enhance long-term stockholder
value. Stock repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.
In May 2019, our Board authorized an increase in the repurchase amount of our stock repurchase program under which we are authorized to repurchase shares of our common stock for an aggregate purchase price not to
exceed $4.0 million in open market transactions in compliance with SEC Rule 10b-18. Although our Board has authorized the stock repurchase program, the stock repurchase program does not obligate us to repurchase any specific dollar amount or to
acquire any specific number of shares. Stock will be purchased from time to time, in the open market in compliance with SEC Rule 10b-18, subject to market conditions and applicable state and federal securities laws. The timing and amount of
repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. In addition, repurchases of our common stock pursuant to our
stock repurchase program could affect the market price of our common stock or increase its volatility. For example, the existence of a stock repurchase program could cause our stock price to be higher than it would be in the absence of such a
program and could potentially reduce the market liquidity for our stock. Additionally, our stock repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic
opportunities and acquisitions. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we determine to repurchase our stock. Although
our stock repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.
Actual or potential sales of our common stock by our directors, employees and consultants, during open trading windows and pursuant to pre-arranged stock trading plans, could
cause our stock price to fall or prevent it from increasing for numerous reasons, and actual or potential sales by such persons could be viewed negatively by other investors.
We have a number of insiders that own significant blocks of our common stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity, tax, or other
reasons, the prevailing market price of our common stock could be negatively affected. In addition, it is possible that our executive officers, consultants, or non-employee members of our Board could sell shares of our common stock during an open
trading window under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could be viewed negatively by other investors and could have a negative effect on the prevailing market price of our common stock.
In accordance with the guidelines specified under Rule 10b5-1 of the Exchange Act, and our policies regarding stock transactions, certain of our directors and consultants have adopted and may continue to adopt stock
trading plans pursuant to which they have arranged to sell shares of our common stock from time to time in the future. Generally, sales under such plans by our directors require public filings. Actual or potential sales of our common stock by such
persons could cause the price of our common stock to fall or prevent it from increasing for numerous reasons. For example, a substantial number of shares of our common stock becoming available (or being perceived to become available) for sale in
the public market could cause the market price of our common stock to fall or prevent it from increasing.
Our outstanding options to purchase shares of common stock could have a possible dilutive effect.
As of December 31, 2019, options to purchase 189,187 shares of common stock were outstanding. In addition, as of December 31, 2019, a total of 1,147,148 options were available for grant under our stock option plans.
The issuance of common stock upon the exercise of these options could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders.
If securities analysts do not publish research reports about Our or Endo’s business or if they downgrade the Our, Endo or our sector, the price of our common stock could
decline.
The trading market for our common stock will depend in part on research reports that industry or financial analysts publish about us and our business and about Endo. If analysts downgrade us or any of our licensees,
including Endo, or other research analysts downgrade the industry in which we operate or the stock of any of our competitors or licensees, the price of our common stock may decline. Additionally, we currently only have one analyst covering our
stock. We lack the potential benefit that coverage by other analysts may provide.
Provisions in our certificate of incorporation and bylaws may prevent or frustrate a change in control.
Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which
you might otherwise receive a premium for your shares. These provisions:
In addition, in May 2002, the Board implemented a rights agreement, commonly known as a Poison Pill, which effectively discourages or prevents acquisitions of more than 15% of our common stock in transactions
(mergers, consolidations, tender offer, etc.) that have not been approved by our Board. The rights agreement has since been amended as follows:
These provisions could make it more difficult for common stockholders to replace members of the Board. Because our Board is responsible for appointing the members of our management team, these provisions could in
turn affect any attempt to replace the current management team.
If our principal stockholders, executive officers and directors choose to act together, they may be able to control our operations, acting in their own best interests and not necessarily in the interest of other
stockholders.
As of March 13, 2020 our executive officers and directors, and their affiliates, in the aggregate, beneficially owned shares representing approximately 15.9% of our common stock. Beneficial ownership includes shares
over which an individual or entity has investment or voting power and includes shares that could be issued upon the exercise of options within 60 days. As a result, if these stockholders were to choose to act together, they may be able to control
all matters submitted to our stockholders for approval, as well as our management and affairs. For example, they could control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets.
This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination that could be favorable to other stockholders.
This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders.