In this Annual Report on Form 10-K, all references to “we,” “our,” “us,” “La Jolla” or “the Company” refer to La Jolla Pharmaceutical Company, a California corporation, and our wholly owned subsidiaries, including La Jolla Pharma, LLC and Tetraphase Pharmaceuticals, Inc., on a consolidated basis.
Item 1. Business
Overview
We are dedicated to the development and commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. GIAPREZA™ (angiotensin II) injection is approved by the U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. XERAVA™ (eravacycline) for injection is approved by the FDA as a tetracycline class antibacterial indicated for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older.
On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc. (“Tetraphase”), a biopharmaceutical company focused on commercializing XERAVA, for $43 million in upfront cash plus potential future cash payments of up to $16 million. Financial results for the period ending December 31, 2020 include Tetraphase’s financial results subsequent to the acquisition closing date of July 28, 2020.
On January 12, 2021, La Jolla Pharmaceutical Company and certain of its wholly owned subsidiaries, including La Jolla Pharma, LLC and Tetraphase, entered into an exclusive licensing agreement (the “PAION License”) with PAION AG and its wholly owned subsidiary (collectively, “PAION”) to commercialize GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and Switzerland whereby La Jolla is entitled to receive an upfront cash payment of $22.5 million plus potential commercial milestone payments of up to $109.5 million and double-digit tiered royalty payments.
As of December 31, 2020, La Jolla had $21.2 million of cash and cash equivalents. On a pro forma basis, adjusting for $18.9 million of upfront net proceeds from the PAION License, net of the amounts due under the George Washington University and Harvard University license agreements, La Jolla had cash and cash equivalents of $40.1 million.
For the three and twelve months ended December 31, 2020, GIAPREZA U.S. net sales were $8.7 million and $29.3 million, respectively, up 19% and 27%, respectively, from the same periods in 2019. Subsequent to July 28, 2020 and through December 31, 2020, XERAVA U.S. net sales were $4.2 million. For the three and twelve months ended December 31, 2020, including the period prior to the acquisition of Tetraphase, XERAVA U.S. net sales were $2.3 million and $8.2 million, respectively, up 53% and 128%, respectively, from the same periods in 2019.
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Product Portfolio
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(1) U.S.: GIAPREZA is a vasoconstrictor to increase blood pressure in adults with septic or other distributive shock
European Union: GIAPREZA is indicated for the treatment of refractory hypotension in adults with septic or other distributive shock who remain hypotensive despite adequate volume restitution and application of catecholamines and other available vasopressor therapies
(2) U.S.: XERAVA is a tetracycline class antibacterial indicated for the treatment of cIAIs in patients 18 years of age and older
European Union: XERAVA is indicated for the treatment of cIAI in adults
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GIAPREZA™ (angiotensin II)
GIAPREZA™ (angiotensin II) injection is approved by the FDA as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. GIAPREZA is approved by the European Commission (“EC”) for the treatment of refractory hypotension in adults with septic or other distributive shock who remain hypotensive despite adequate volume restitution and application of catecholamines and other available vasopressor therapies. GIAPREZA mimics the body’s endogenous angiotensin II peptide, which is central to the renin-angiotensin-aldosterone system (“RAAS”), which in turn regulates blood pressure. GIAPREZA is marketed in the U.S. by La Jolla Pharmaceutical Company on behalf of La Jolla Pharma, LLC, its wholly owned subsidiary, and will be marketed in Europe by PAION AG on behalf of La Jolla Pharma, LLC.
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Distributive shock is the most common form of shock (Vincent et al, New England Journal of Medicine 2013; 369(18):1726−1734).
Types of Shock(1)
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(1) Vincent et al, New England Journal of Medicine 2013; 369(18):1726−1734
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Distributive shock is a leading cause of death in hospitalized patients. Septic shock accounts for more than 90% of distributive shock (Vincent et al, New England Journal of Medicine 2013; 369(18):1726–1734). Shock affects one-third of patients in the intensive care unit (“ICU”) (Sakr et al, Critical Care Medicine 2006; 34:589–597). The mortality rate of distributive shock exceeds that of most acute conditions requiring hospitalization.
Mortality Rate
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(1) Based on the 28-day mortality rates of: (i) 35% from the vasopressin arm of Russell et al, New England Journal of Medicine 2008; 358:877–87; (ii) 49% from the norepinephrine arm of De Backer et al, New England Journal of Medicine 2010; 362:779–89; and (iii) 54% from the placebo arm (high-dose norepinephrine or equivalent) of Khanna et al, New England Journal of Medicine 2017; 377:419–430
(2) 30-day mortality rate from Medicare.gov
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The RAAS is one of three systems that work in harmony to regulate blood pressure. GIAPREZA regulates blood pressure through the RAAS. Other therapeutic options regulate blood pressure through the adrenal system and vasopressin system.
In Healthy Individuals, Three Systems Work in Harmony to Regulate Blood Pressure
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Annually in the U.S., approximately 130,000−200,000 patients fail to respond to current vasopressor options.
Response to Current Vasopressor Options
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(1) Annually in the U.S.
(2) Year ended December 31, 2020 per Symphony Health Solutions
(3) Estimate based on Russell et al, New England Journal of Medicine 2008; 358:877−87 and Asfar et al, New England Journal of Medicine 2014; 370:1583−93
(4) Annual sales per Endo International plc SEC filings, divided by price per vial per Wolters Kluwer PriceRx
(5) Estimate based on Dunser et al, Circulation 2003; 107:2313−2319 and Gordon et al, Critical Care Medicine 2014; 42(6):1325−1333
(6) Year ended December 31, 2020 per Endo International plc SEC filings
(7) $212.38 per vial per Wolters Kluwer PriceRx, multiplied by 10 vials per patient
(8) Estimate based on: 35.4% 28-day mortality rate in vasopressin arm of Russell et al, New England Journal of Medicine 2008; 358:877–87; 48.5% 28-day mortality rate in norepinephrine arm of De Backer et al, New England Journal of Medicine 2010; 362:779–789; and 54.6% non-responder rate on vasopressin from Sacha et al, Annals of Intensive Care 2018; 8:35
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Angiotensin II for the Treatment of High-Output Shock (“ATHOS-3”)
GIAPREZA was approved by the FDA and the EC based on the results of ATHOS-3, which were published in the New England Journal of Medicine in August 2017. ATHOS-3 was a multinational, randomized, double-blind, placebo-controlled study in which 321 adults with septic or other distributive shock who remained hypotensive despite fluid and vasopressor therapy received either GIAPREZA or placebo, both in addition to background vasopressor therapy. The primary endpoint was mean arterial pressure (“MAP”) response, defined as a MAP of 75 mm Hg or higher or an increase in MAP from baseline of at least 10 mm Hg without an increase in the dose of background vasopressors at Hour 3 (Khanna et al, New England Journal of Medicine 2017; 377:419–430).
ATHOS-3 Study Design(1)
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MAP=mean arterial pressure
(1) Khanna et al, New England Journal of Medicine 2017; 377:419–430
(2) Standard-of-care vasopressors included norepinephrine, epinephrine, dopamine and vasopressin
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GIAPREZA significantly improved blood pressure response. Specifically, the primary endpoint was achieved by 70% of GIAPREZA-treated patients compared to 23% of placebo-treated patients (p <0.0001).
Primary Endpoint: Mean Arterial Pressure Response(1),(2)
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(1) GIAPREZA FDA prescribing information
(2) MAP response of 75 mm Hg or higher or an increase from baseline of at least 10 mm Hg at Hour 3 without an increase in the dose of background vasopressors
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GIAPREZA provides the ability to rapidly achieve and adjust therapeutic response. GIAPREZA rapidly increased MAP with a median time to MAP response of approximately 5 minutes. The plasma half-life of GIAPREZA is less than 1 minute.
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In addition, a positive survival trend was observed. Mortality through Day 28 was 46% on GIAPREZA and 54% on placebo (hazard ratio 0.78; 95% confidence interval 0.57–1.07).
Positive Survival Trend Observed (N=321)(1),(2)
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(2) Khanna et al, New England Journal of Medicine 2017; 377:419–430
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The most common adverse reactions that were reported in greater than 10% of GIAPREZA-treated patients were thromboembolic events.
Adverse Reactions Occurring in ≥4% of Patients Treated with GIAPREZA and ≥1.5% More Often than in Placebo-treated Patients(1)
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(1) GIAPREZA FDA prescribing information
(2) Including arterial and venous thrombotic events
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Note: There is a potential for venous and arterial thrombotic and thromboembolic events in patients who receive GIAPREZA. As stated in the GIAPREZA FDA prescribing information, use concurrent venous thromboembolism (“VTE”) prophylaxis.
Percentage of Patients Experiencing ≥1 Adverse Event, ≥1 Serious Adverse Event and Discontinuing Treatment Due to an Adverse Event(1)
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(1) Khanna et al, New England Journal of Medicine 2017; 377:419–430
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XERAVA™ (eravacycline)
XERAVA™ (eravacycline) for injection is approved by the FDA as a tetracycline class antibacterial indicated for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older. XERAVA is approved by the EC for the treatment of cIAI in adults. XERAVA is marketed in the U.S. by Tetraphase Pharmaceuticals, Inc., a wholly owned subsidiary of La Jolla, and will be marketed in Europe by PAION AG on behalf of Tetraphase Pharmaceuticals, Inc.
cIAIs are the second most common source of severe sepsis in the ICU (Brun-Buisson et al, JAMA 1995; 274(12):968–974). cIAIs are defined as consequences of perforations of the gastrointestinal tract that result in contamination of the peritoneal space (Solomkin et al, Clinical Infectious Diseases 2018; 69(6):921–929).
Source of Severe Sepsis in the ICU (%)(1)
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(1) Brun-Buisson et al, JAMA 1995; 274(12):968–974
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The use of antimicrobial agents that have activity against gram-negative, gram-positive and anaerobic pathogens is strongly recommended for the empiric treatment (treatment without a specific pathogen diagnosis) of patients with cIAI. The increased prevalence of resistant bacteria makes the selection of appropriate treatment more challenging (Mazuski et al, Surgical Infections 2017; 18(1):1–76).
2,733 Baseline Pathogens in 846 Patients with cIAI
3.2 Pathogens/Patient(1)
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(1) Data on file from IGNITE1 and IGNITE4 microbiologic intent-to-treat (micro-ITT) population
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Approximately 3 million patients with cIAIs receive approximately 17 million days of broad-spectrum antibiotics.
~3 MM Patients with cIAIs Receive Broad-Spectrum Antibiotics
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(1) 2014 Decision Resources AMR Hospital Database
(2) Annually in the U.S. and EU5 (France, Germany, Italy, Spain and the United Kingdom)
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Investigating Gram-negative Infections Treated with Eravacycline (“IGNITE”)
XERAVA was approved by the FDA and the EC based on the results of IGNITE1 and IGNITE4, which were published in JAMA Surgery in March 2017 and Clinical Infectious Diseases in December 2018, respectively.
IGNITE1 was a multinational, randomized, double-blind, active-controlled study in 538 patients with clinical evidence of cIAIs requiring urgent surgical or percutaneous intervention who received either XERAVA or ertapenem. The primary endpoint was clinical cure, defined as complete resolution or significant improvement of signs or symptoms of the index infection, at the test of cure (“TOC”) visit. The TOC visit was conducted 25 to 31 calendar days after the first dose of the study drug was administered.
IGNITE4 was a multinational, randomized, double-blind, active controlled study in 499 patients with clinical evidence of cIAIs requiring urgent surgical or percutaneous intervention who received either XERAVA or meropenem. The primary endpoint was clinical cure, defined as complete resolution or significant improvement of signs or symptoms of the index infection, at the TOC visit. The TOC visit was conducted 25 to 31 calendar days after the first dose of the study drug was administered.
IGNITE1 and IGNITE4 Study Design
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(1) Solomkin et al, JAMA Surgery 2017; 152(3):224-232
(2) Solomkin et al, Clinical Infectious Diseases 2018; 69(6):921-9
(3) TOC visit was conducted 25 to 31 calendar days after the first dose of the study drug was administered
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XERAVA demonstrated statistical noninferiority in clinical cure rate in the micro-ITT population, which included all randomized subjects who had baseline bacterial pathogens that caused cIAIs and against at least one of which the investigational drug has in vitro (in a test tube) antibacterial activity (N=846).
Primary Endpoint: Clinical Cure Rate(1)
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(1) XERAVA FDA prescribing information
(2) Noninferiority margins of 10% and 12.5% were used for IGNITE1 and IGNITE4, respectively
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Clinical cure rates across patients with gram-negative, gram-positive and anaerobic pathogens, including those with resistant strains, are shown in the following tables.
Clinical Cure Rates at TOC by Selected Baseline Pathogens in the Micro-ITT Population(1)
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N=Number of subjects in the micro-ITT Population; N1=Number of subjects with a specific pathogen; n=Number of subjects with a clinical cure at the TOC visit
(1) XERAVA FDA prescribing information
(2) Comparators included ertapenem and meropenem for IGNITE1 and IGNITE4, respectively
(3) Includes Streptococcus anginosus, Streptococcus constellatus, and Streptococcus intermedius
(4) Includes Bacteroides caccae, Bacteroides fragilis, Bacteroides ovatus, Bacteroides thetaiotaomicron, Bacteroides uniformis, Bacteroides vulgatus, Clostridium perfringens, and Parabacteroides distasonis
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XERAVA Demonstrated High Clinical Cure Rates Against Resistant Pathogens(1)
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CEPH-R=cephalosporin-resistant; ESBL=extended-spectrum β-lactamases; MDR=multidrug resistance;
N=Number of subjects in the micro-ITT Population; N1=Number of subjects with a specific pathogen; n=Number of subjects with a clinical cure at the TOC visit
(1) Ditch et al, 2018 ASM Microbe Annual Meeting
(2) Comparators included ertapenem and meropenem for IGNITE1 and IGNITE4, respectively
(3) Data on file from IGNITE1 and IGNITE4 micro-ITT population
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The most common adverse reactions that were reported in XERAVA-treated patients in IGNITE1 and IGNITE4 were infusion site reactions.
Selected Adverse Reactions Reported in ≥1% of Patients Receiving XERAVA(1)
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(1) XERAVA FDA prescribing information
(2) Comparators included ertapenem and meropenem for IGNITE1 and IGNITE4, respectively
(3) Infusion site reactions include: catheter/vessel puncture site pain, infusion site extravasation, infusion site hypoaesthesia, infusion/injection site phlebitis, infusion site thrombosis, injection site/vessel puncture site erythema, phlebitis, phlebitis superficial, thrombophlebitis, and vessel puncture site swelling
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Product Candidates
In connection with the acquisition of Tetraphase, we acquired the following product candidates that are in early stage clinical or preclinical development: (1) TP-6076, an IV formulation of a fully synthetic fluorocycline derivative for the treatment of certain multidrug-resistant gram-negative bacteria; (2) TP-271, an IV and oral formulation of a fully synthetic fluorocycline for the treatment of respiratory disease caused by bacterial biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia; and (3) TP-2846, an IV formulation of a tetracycline for the treatment of acute myeloid leukemia. At this time, there are no active studies nor anticipated future studies for any of these product candidates. We intend to seek out-licensing opportunities for these product candidates; however, at this time, we are unable to predict the likelihood of successfully out-licensing any of these product candidates.
Sales and Marketing Organization
La Jolla employs an experienced sales and marketing team dedicated to the commercialization of GIAPREZA and XERAVA. As of December 31, 2020, this team consisted of 39 professionals, including 29 critical care specialists.
Customers
During the year ended December 31, 2020, 521 hospitals in the U.S. purchased GIAPREZA. During the year ended December 31, 2020, 750 hospitals and other healthcare organizations in the U.S. purchased XERAVA. Hospitals and other healthcare organizations purchase our products through a network of specialty and wholesale distributors. We do not believe that the loss of any one of these distributors would significantly impact our ability to distribute GIAPREZA or XERAVA, as we expect that sales volume would be absorbed by the remaining distributors. Due to the relatively short lead-time required to fill orders for GIAPREZA and XERAVA, backlog is not material to our business.
Competition
Catecholamines (primarily norepinephrine), which are available as generics and inexpensive, are typically used first line to treat distributive shock, while Vasostrict® (Endo International plc) is typically used second line. In the randomized, Phase 3 study ATHOS-3, GIAPREZA demonstrated clinical benefit in patients who were not adequately responding to available vasopressors, including catecholamines and Vasostrict. GIAPREZA’s principal competition as a treatment in patients not adequately responding to available vasopressors is the use of these same vasopressors, particularly norepinephrine, at increased doses. If we are unable to successfully change treatment practices, the commercial prospects for GIAPREZA will be limited, and our business will suffer.
XERAVA competes with a number of antibiotics that are currently marketed for the treatment of cIAI and other multidrug resistant infections, including: AVYCAZ (ceftazidime and avibactam, marketed by AbbVie Inc.); MERREM IV® (meropenem, marketed by AstraZeneca PLC); PRIMAXIN® (imipenem and cilastatin, marketed by Merck & Co., Inc.); RECARBRIO™ (imipenem, cilastatin, and relebactam, marketed by Merck & Co., Inc.); TYGACIL® (tigecycline, marketed by Pfizer Inc.); VABOMERE™ (meropenem and vaborbactam, marketed by Melinta Therapeutics, Inc.); ZERBAXA® (ceftolozane and tazobactam, marketed by Merck & Co., Inc.); ZOSYN® (piperacillin and tazobactam, marketed by Pfizer Inc.); and current and future generic versions of marketed antibiotics. If we are unable to successfully change treatment practices, the commercial prospects for XERAVA will be limited, and our business will suffer.
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Manufacturing
We do not currently own or operate manufacturing facilities for the production of GIAPREZA or XERAVA. We rely on third-party manufacturers to produce GIAPREZA and XERAVA and expect to continue to do so to meet our development and commercial needs. In all of our manufacturing agreements, we require that contract manufacturers produce active pharmaceutical ingredients (“APIs”) and drug products in accordance with the FDA’s current Good Manufacturing Practices (“cGMPs”) and all other applicable laws and regulations. We maintain confidentiality agreements with potential and existing manufacturers in order to protect our proprietary rights related to GIAPREZA and XERAVA. The long-term commercial success of GIAPREZA and XERAVA will depend in part on the ability of our contract manufacturers to supply cGMP-compliant API and drug product without interruption.
Regulatory Exclusivity
GIAPREZA and XERAVA are New Chemical Entities (“NCEs”) approved by the FDA. In the U.S., NCEs approved by the FDA are eligible for market exclusivity under the U.S. Federal Food, Drug, and Cosmetic Act (“FDCA”), which can prevent the approval of generic versions of the NCE for 5 to 7.5 years from the date of the initial approval of the NCE. Specifically, the FDCA provides a 5-year period of marketing exclusivity within the U.S. to the applicant that gains approval of an NDA for an NCE. A drug is an NCE if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an Abbreviated New Drug Application (“ANDA”) or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all of the data required for approval. However, an application may be submitted 4 years after the NDA approval of the NCE if it contains a certification of patent invalidity or non-infringement. This certification will trigger an automatic stay in the approval of any generic competition until the earlier of: (a) 30 months from the certification; or (b) a court ruling of patent invalidity or non-infringement for the relevant patents. In the absence of a court ruling, the 30-month stay will be extended by such amount of time (if any) that is required for 7.5 years to have elapsed from the date of NDA approval of the NCE.
Under the Generating Antibiotic Incentives Now (“GAIN”) provisions of the Food and Drug Administration Safety and Innovation Act (“FDASIA”), the FDA may designate a product as a qualified infectious disease product (“QIDP”). In order to receive this designation, a drug must qualify as an antibacterial or antifungal drug for human use intended to treat serious or life-threatening infections. We obtained a QIDP designation for the IV formulation of XERAVA for cIAI in July 2013. Upon approving an application for a QIDP, the FDA will extend by an additional five years any non-patent marketing exclusivity period awarded, such as a five-year exclusivity period awarded for an NCE. This extension is in addition to any pediatric exclusivity extension awarded. XERAVA has been awarded this five-year exclusivity under FDASIA.
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Intellectual Property
Patents and other proprietary rights are important to our business. As of February 19, 2021, the intellectual property portfolio relating to GIAPREZA included 12 issued U.S. patents, 8 pending U.S. patent applications, 8 issued foreign patents, 45 pending foreign patent applications, and 1 international patent application filed under the Patent Cooperation Treaty (“PCT”). The issued U.S. patents, and patents that may issue from the pending U.S. patent applications, will expire between 2029 and 2038, absent any disclaimers, extensions, or adjustments of patent term. The foreign patents, and patents that may issue from the pending foreign patent applications, will expire between 2034 and 2037, absent any disclaimers, extensions, or adjustments of patent term. Patents that may issue from applications claiming priority to the PCT application will expire in 2040, absent any disclaimers, extensions, or adjustments of patent term.
As of February 19, 2021, we owned 2 issued U.S. patents, 1 pending U.S. patent application, 17 issued foreign patents and 5 pending foreign patent applications relating to XERAVA. The issued U.S. patents, and the patent that may issue from the pending U.S. patent application, will have an expiration date of August 7, 2029, absent any disclaimers, extensions or adjustments of patent term. The term of one of the U.S. patents has received 508 days of patent term adjustment. The foreign patents, and patents that may issue from the pending foreign applications, will likewise have an expiration date of August 7, 2029, absent any disclaimers, extensions or adjustments of patent term.
As of February 19, 2021, we also filed applications for Supplementary Protection Certificates based on European Patent No. 2323972 covering the composition of matter and use of XERAVA. Some applications have been granted and others are pending.
As of February 19, 2021, we also owned 1 pending U.S. patent application and 10 pending foreign patent applications that relate to crystalline forms of eravacycline. Any U.S. patent that may issue from the pending patent application will expire in 2037 absent any disclaimers, extensions, or adjustments of patent term. Likewise, any foreign patents that may issue from the pending foreign patent applications will expire in 2037.
The following table summarizes our issued patents and pending applications for GIAPREZA, XERAVA and other tetracycline-related intellectual property.
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United States
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Foreign (including PCT)
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Description
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Issued
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Pending
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Expiration
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Issued
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Pending
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Expiration
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GIAPREZA
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12
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8
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2029−2038
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8
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45
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2034−2040
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XERAVA
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2
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2
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2029−2037
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17
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15
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2029−2037
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Other
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8
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2
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2029−2040
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52
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32
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2029−2040
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Material Contracts
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations.”
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Government Regulation
Pharmaceutical products, including GIAPREZA and XERAVA, are subject to extensive government regulation. In the U.S., the FDA regulates pharmaceutical products. FDA regulations govern the testing, research and development activities, manufacturing, quality, storage, advertising, promotion, labeling, sale and distribution of pharmaceutical products. Accordingly, there is a rigorous process for the approval of new drugs and ongoing oversight of marketed products. We may also be subject to foreign regulatory requirements governing clinical studies and drug products if products are tested or marketed abroad. The approval process outside of the U.S. varies from jurisdiction to jurisdiction and the time required may be longer or shorter than that required for FDA approval.
Regulation in the U.S.
The FDA testing and approval process requires substantial time, effort and financial resources. We cannot assure you that any of our product candidates will ever obtain approval. The FDA approval process for new drugs includes, without limitation:
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submission in the U.S. of an IND for clinical studies conducted in the U.S.;
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adequate and well-controlled clinical studies to establish safety and efficacy of the product;
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review and approval of an NDA in the U.S.; and
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inspection of the facilities used in the manufacturing of the drug to assess compliance with the FDA’s cGMP regulations.
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Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMPs, which impose certain procedural and documentation requirements on us and our third-party manufacturers. Even after regulatory approval is obtained, under certain circumstances, such as later discovery of previously unknown safety risks, the FDA can withdraw approval or subject the drug to additional restrictions.
The FDA closely regulates the marketing and promotion of drugs. Drugs may only be marketed in a manner consistent with their FDA-approved labeling. Approval may be subject to post-marketing surveillance and other record-keeping and reporting obligations. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing.
The failure to comply with FDA’s requirements may result in adverse publicity, warning letters, corrective advertising, restrictions on marketing or manufacturing, refusals to review pending product applications, refusals to permit the import or export of products, seizures, injunctions, and civil and criminal penalties.
Third-party Payor Coverage and Reimbursement
In the U.S. and most major foreign markets, drugs like GIAPREZA and XERAVA that are administered in the hospital must be purchased by the hospital and generally are not reimbursed by third-party payors. Hospitals instead are reimbursed for patient cases based on patients’ diagnosed conditions under the U.S. Medicare diagnosis-related group (“DRG”) system or other like systems for non-Medicare patients in the U.S. and in most major foreign markets. Adoption of new drugs that are administered in the hospital generally occurs more slowly than adoption of new drugs that are taken on an outpatient basis, which generally are paid for by third-party payors.
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U.S. Health Care Fraud and Abuse Laws and Compliance Requirements
We are subject to various federal and state laws targeting fraud and abuse in the health care industry. These laws may impact, among other things, our sales and marketing efforts. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
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The federal Anti-Kickback Statute, which prohibits, among other things, persons from soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, an item or service reimbursable under a federal health care program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value, including for example gifts, cash payments, donations, the furnishing of supplies or equipment, waivers of payment, ownership interests, and providing any item, service or compensation for something other than fair market value.
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Federal false claims and civil monetary penalties laws, including the federal civil False Claims Act, which prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent. Although we may not submit claims directly to payors, manufacturers can be held liable under these laws in a variety of ways. These include: providing inaccurate billing or coding information to customers; improperly promoting a product’s off-label use; violating the federal Anti-Kickback Statute; or misreporting pricing information to government programs.
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Provisions of the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit, among other things, knowingly and willfully executing a scheme to defraud any health care benefit program or making false statements in connection with the delivery of or payment for health care benefits, items or services.
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The federal Physician Payment Sunshine Act requirements, under the Patient Protection and Affordable Care Act (“PPACA”), which require manufacturers of certain drugs and biologics to track and report to U.S. Centers for Medicare & Medicaid Services (“CMS”) payments and other transfers of value they make to U.S. physicians and teaching hospitals as well as physician ownership and investment interests in the manufacturer.
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Provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations (“HITECH”), which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information.
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Section 1927 of the Social Security Act, which requires that manufacturers of drugs and biological products covered by Medicaid report pricing information to CMS on a monthly and quarterly basis, including the best price available to any customer of the manufacturer, with certain exceptions for government programs, and pay prescription rebates to state Medicaid programs based on a statutory formula derived from reported pricing information.
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State law equivalents of each of the above federal laws, such as the recently effective California Consumer Privacy Act, many of which differ from each other in significant ways and may not have the same effect, which complicates our compliance efforts.
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Regulation in Non-U.S. Jurisdictions
In addition to regulations in the U.S., we may be subject to a variety of foreign regulations governing clinical studies and commercial sales and distribution of GIAPREZA, XERAVA or future products. For example, clinical studies conducted in the European Union must be done under a clinical trial application (“CTA”), which is usually supported by an Investigational Medicinal Product Dossier (“IMPD”), and the oversight of ethics committees. If we market GIAPREZA in foreign countries, we also will be subject to foreign regulatory requirements governing marketing approval for pharmaceutical products. The requirements governing the conduct of clinical studies, product approval, pricing and reimbursement vary widely from country to country. Whether or not FDA approval has been obtained, approval of a product by the regulatory authorities of foreign countries must be obtained before marketing the product in those countries. The approval process varies from country to country, and the time required for such approvals may differ substantially from that required for FDA approval. Foreign regulatory approval processes involve many of the risks associated with FDA marketing approval discussed above. There is no assurance that any FDA approval of any of our product candidates will result in similar foreign approvals or vice versa. The process for clinical studies in the European Union and other countries is similar, and studies are heavily scrutinized by the designated ethics committees and regulatory authorities. In addition, foreign regulations may include applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or other transfers of value to health care professionals and entities.
In Europe, the European Union General Data Protection Regulation (2016/679) (“GDPR”) contains provisions specifically directed at the processing of health information. The GDPR provides for potentially significant sanctions and contains extraterritoriality measures intended to bring non-EU companies under the regulation. In addition to the GDPR, individual countries in Europe and elsewhere in the world have enacted similar data privacy legislation. This legislation imposes increased compliance obligations and regulatory risk, including the potential for significant fines for noncompliance.
Other Laws and Regulations
We are subject to a variety of financial disclosure and securities trading regulations as a public company in the U.S., including laws relating to the oversight activities of the U.S. Securities and Exchange Commission (“SEC”) and the regulations of the Nasdaq Capital Market, on which our shares of common stock are traded. We are also subject to various laws and regulations relating to safe working conditions, laboratory practices and the experimental use of animals.
Human Capital
As of December 31, 2020, we employed 59 full-time equivalent employees. None of our employees are represented by labor unions or covered by collective bargaining agreements, and we consider our relations with our employees to be good. We also hire consultants and contract with third parties, as needed, to provide additional resources to support our business activities.
Our key human capital management objectives are to identify, recruit, integrate, retain and motivate our new and existing employees. We believe that our compensation and benefit programs are appropriately designed to attract and retain qualified talent. Employees receive an annual base salary and are eligible to earn performance-based cash bonuses. To create and maintain a successful work environment, we offer a comprehensive package of additional benefits that support the physical and mental health and wellness of all of our employees and their families. Additionally, we grant equity awards in order to allow for directors, officers, employees and consultants of La Jolla to share in the performance of the Company.
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Corporate and Other Information
The Company was incorporated in Delaware in 1989 and reincorporated in California in 2012. Effective April 15, 2021, our principal executive offices will be located at 201 Jones Road, Suite 400, Waltham, Massachusetts 02451. Our telephone number is (617) 715-3600. Shares of our common stock trade on the Nasdaq Capital Market under the symbol “LJPC.” Our website address is www.ljpc.com. Information contained on or accessible through our website is not a part of this Annual Report on Form 10-K, and the inclusion of our website address in this Annual Report on Form 10-K is an inactive textual reference only.
We file electronically with the SEC our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available on our website at www.ljpc.com, free of charge, copies of these reports as soon as reasonably practicable after filing or furnishing these reports with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
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Item 1A. Risk Factors
An investment in shares of our common stock involves a high degree of risk. You should carefully consider the material risks and uncertainties described below before deciding whether to purchase shares of our common stock. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our audited financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our business, financial condition, results of operations, cash flow, reputation and prospects could be materially and adversely affected by any of these risks and uncertainties, including risks and uncertainties not currently known to us or that we currently do not believe to be material. In any such case, the trading price of shares of our common stock could decline, and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We are substantially dependent on the commercial success of GIAPREZA™ (angiotensin II) and XERAVA™ (eravacycline).
The success of our business is substantially dependent on our ability to successfully commercialize GIAPREZA™ (angiotensin II) and XERAVA™ (eravacycline). The market for effective pharmaceutical sales and marketing professionals is competitive, and maintaining these capabilities is expensive and challenging. If we are unable to maintain an effective sales and marketing organization, GIAPREZA and XERAVA sales could be adversely affected, and our business could suffer.
In the U.S. and most major foreign markets, drugs like GIAPREZA and XERAVA that are administered in the hospital must be purchased by the hospital and generally are not directly reimbursed by third-party payors. Hospitals instead are reimbursed for patient cases based on patients’ diagnosed conditions under the U.S. Medicare diagnosis-related group (“DRG”) system or other like systems for non-Medicare patients in the U.S. and in most major foreign markets. Adoption of new drugs that are administered in the hospital generally occurs more slowly than adoption of new drugs that are taken on an outpatient basis, which generally are paid for by third-party payors. If we are unsuccessful at convincing hospitals and health care providers to increase their rate of adoption of GIAPREZA and XERAVA, our business will suffer.
Catecholamines (primarily norepinephrine), which are available as generics and inexpensive, are typically used in the first line to treat distributive shock, while Vasostrict® (Endo International plc) is typically used in the second line. In the randomized, Phase 3 study ATHOS-3, GIAPREZA demonstrated clinical benefit in patients who were not adequately responding to available vasopressors, including catecholamines and Vasostrict. GIAPREZA’s principle competition as a treatment in patients not adequately responding to available vasopressors is the use of these same vasopressors, particularly norepinephrine, at increased doses. If we are unable to successfully change treatment practices, the commercial prospects for GIAPREZA will be limited, and our business will suffer.
XERAVA competes with a number of antibiotics that are currently marketed for the treatment of cIAI and other multidrug resistant infections, including: AVYCAZ (ceftazidime and avibactam, marketed by AbbVie Inc.); MERREM IV® (meropenem, marketed by AstraZeneca PLC); PRIMAXIN® (imipenem and cilastatin, marketed by Merck & Co., Inc.); RECARBRIO™ (imipenem, cilastatin, and relebactam, marketed by Merck & Co., Inc.); TYGACIL® (tigecycline, marketed by Pfizer Inc.); VABOMERE™ (meropenem and vaborbactam, marketed by Melinta Therapeutics, Inc.); ZERBAXA® (ceftolozane and tazobactam, marketed by Merck & Co., Inc.); ZOSYN® (piperacillin and tazobactam, marketed by Pfizer Inc.); and current and future generic versions of marketed antibiotics. If we are unable to successfully change treatment practices, the commercial prospects for XERAVA will be limited, and our business will suffer.
In an effort to remain competitive in the marketplace, we may determine, from time to time, to change our pricing, dosage forms and strengths, and other marketing strategies for GIAPREZA and XERAVA, including altering the amount or availability of discounts or rebates. Any such changes could have short-term or long-term negative impacts on our net sales, which would cause our business and results of
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operations to suffer. Price increases or changes to our marketing strategies may also negatively affect our reputation and our ability to secure and maintain reimbursement coverage for GIAPREZA and XERAVA, which could result in decreased demand and cause our business and results of operations to suffer. If we are unable to successfully price or market GIAPREZA or XERAVA, the commercial prospects for GIAPREZA and XERAVA will be limited, and our business will suffer.
Our estimates of the potential market sizes for GIAPREZA and XERAVA are based on prescription and sales data for relevant in-market products, the results of clinical studies, medical literature and other information. If the potential market sizes for GIAPREZA and XERAVA are smaller than our estimates, the commercial prospects for GIAPREZA and XERAVA may be limited, and our business may suffer.
The commercial success of GIAPREZA and XERAVA will depend on our ability to obtain an uninterrupted supply of GIAPREZA and XERAVA from our contract manufacturers.
We do not currently own or operate manufacturing facilities for the production of GIAPREZA or XERAVA. We rely on sole-source contract manufacturers to produce GIAPREZA and XERAVA and expect to continue to do so to meet our development and commercial needs. In all of our manufacturing agreements, we require that contract manufacturers produce active pharmaceutical ingredients (“APIs”) and drug products in accordance with the U.S. Food and Drug Administration’s (“FDA’s”) current Good Manufacturing Practices (“cGMPs”) and all other applicable laws and regulations. The long-term commercial success of GIAPREZA and XERAVA will depend in part on the ability of our contract manufacturers to supply cGMP-compliant API and drug product without interruption. If there is an interruption in the supply of GIAPREZA and XERAVA from our contract manufacturers, our business will suffer.
Our ability to realize the benefits from the acquisition of Tetraphase is substantially dependent on the commercial success of XERAVA.
Our ability to realize the benefits from the acquisition of Tetraphase is substantially dependent on our ability to successfully commercialize XERAVA. Combining with La Jolla may not accelerate XERAVA’s availability to patients in need, and our presence in the hospital may not increase with a second innovative therapy. If we are unsuccessful at convincing hospitals and health care providers to increase their rate of adoption of XERAVA, our sales could be adversely affected, and our business could suffer.
Product liability or other lawsuits against us could cause us to incur substantial liabilities and reduce GIAPREZA and XERAVA sales.
Patients suffering from distributive shock are gravely ill and have a high mortality rate. Although 28-day mortality in patients treated with GIAPREZA was lower than in patients treated with placebo in the randomized, Phase 3 study ATHOS-3, there was a higher incidence of arterial and venous thrombotic and thromboembolic events in patients treated with GIAPREZA in this study. Some patients who are treated with GIAPREZA will die due to their underlying illness or suffer adverse events (which may or may not be drug related). Additionally, patients suffering from cIAI may become gravely ill and may die due to underlying illness or suffer adverse events (which may or may not be drug related). As such, we may face product liability lawsuits. Although we carry product liability insurance, product liability lawsuits against us could cause us to incur substantial liabilities and reduce GIAPREZA and XERAVA sales. Furthermore, any such lawsuits could impair our business reputation and result in the initiation of investigations by regulators.
Additionally, we may not have and may not be able to obtain insurance on acceptable terms or with adequate coverage against potential liabilities or other losses if any claim or lawsuit is brought against us, regardless of the success or failure of the claim or lawsuit. Even where claims are submitted to insurance carriers for defense and indemnity, there can be no assurance that the claims will be fully covered by insurance or that the indemnitors or insurers will remain financially viable to cover the cost of such claims. Any such claims or lawsuits could materially impact our financial condition, and our business could suffer.
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Our ability to continue commercializing GIAPREZA is dependent on our fulfillment of contractual obligations under the royalty financing agreement with HealthCare Royalty Partners.
In May 2018, we closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, we received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the royalty rate will be a maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by 4% if an agreed-upon, cumulative net product sales threshold has not been met, and, starting January 1, 2024, the maximum royalty rate may increase by an additional 4% if a different agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by our wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA. However, under the terms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. In the event that La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR would have the right to foreclose on the GIAPREZA-related assets.
The commercial success of GIAPREZA and XERAVA in certain ex-US territories is dependent on the fulfillment of contractual obligations under the Company’s out-license agreements.
PAION AG License
On January 12, 2021, La Jolla Pharmaceutical Company and certain of its wholly owned subsidiaries, including La Jolla Pharma, LLC and Tetraphase, entered into an exclusive licensing agreement (the “PAION License”) with PAION AG and its wholly owned subsidiary (collectively, “PAION”). Pursuant to the PAION License, La Jolla granted PAION an exclusive license to commercialize GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and Switzerland (collectively, the “PAION Territory”). La Jolla is entitled to receive an upfront cash payment of $22.5 million plus potential commercial milestone payments of up to $109.5 million and double-digit tiered royalty payments. In addition, royalties payable under the PAION License will be subject to reduction on account of generic competition and after patent expiration in a jurisdiction. Pursuant to the PAION License, PAION will be solely responsible for the future development and commercialization of GIAPREZA and XERAVA in the PAION Territory. PAION is required to use commercially reasonable efforts to commercialize GIAPREZA and XERAVA in the PAION Territory. The Company agreed to use commercially reasonable efforts to negotiate and enter into a separate commercial supply agreement to manufacture drug product for commercial supply. The Company has not yet entered into a commercial supply agreement with PAION, which would set the quantity and timing of commercial supply. The Company has not received any payments from PAION related to either royalties or commercial milestones. If the Company is held to not have met its commercial supply obligations, or if PAION is unable to successfully develop and commercialize GIAPREZA or XERAVA in the PAION Territory, the commercial prospects for GIAPREZA and XERAVA in the PAION Territory will be limited, and our business will suffer.
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Everest Medicines Limited License
In February 2018, Tetraphase entered into a license agreement with Everest Medicines Limited (“Everest”), which was subsequently amended and restated (the “Everest License”). Pursuant to the Everest License, Tetraphase granted Everest an exclusive license to develop and commercialize XERAVA for the treatment of cIAI and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines (collectively, the “Everest Territory”). The Company is eligible to receive up to an aggregate of $11.0 million in future clinical development and regulatory milestone payments and up to an aggregate of $20.0 million in sales milestone payments. The Company is also entitled to receive tiered royalties from Everest at percentages in the low double digits on sales, if any, in the Everest Territory of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Everest Territory until the latest to occur of: (1) the last-to-expire of specified patent rights in such jurisdiction in the Everest Territory; (2) expiration of marketing or regulatory exclusivity in such jurisdiction in the Everest Territory; or (3) 10 years after the first commercial sale of a product in such jurisdiction in the Everest Territory. In addition, royalties payable under the Everest License will be subject to reduction on account of generic competition and after patent expiration in a jurisdiction, with any such reductions capped at certain percentages of the amounts otherwise payable during the applicable royalty payment period. Pursuant to the Everest License, Everest will be solely responsible for the development and commercialization of licensed products in the Everest Territory. The Company agreed to use commercially reasonable efforts to manufacture drug product for clinical development, which will be paid by Everest at the cost to manufacture, as well as manufacture drug product for commercial supply, which will be paid by Everest at cost plus a reasonable margin. The Company has not yet entered into a commercial supply agreement with Everest, which would set the quantity and timing of commercial supply. Subsequent to July 28, 2020 and through December 31, 2020, the Company has not received any payments from Everest related to either royalties or clinical development and regulatory milestones. If Tetraphase is held to not have met its commercial supply obligations, or if Everest is unable to successfully develop and commercialize XERAVA in the Everest Territory, the commercial prospects for XERAVA in the Everest Territory will be limited, and our business will suffer.
Our overall financial performance, including but not limited to net product sales and net cash used for or provided by operating activities, may not meet our expectations.
Our overall financial performance, including but not limited to net product sales and net cash used for or provided by operating activities, including any milestone and/or royalty payments resulting from licensing agreements and any distributions received in connection with our non-voting profits interest, is difficult to predict and may fluctuate from quarter to quarter and year to year. Historical financial performance may not be indicative of future financial performance. For example, our net product sales may be below expectations, and our costs to operate our business, including cost of product sales, research and development expenses and selling, general and administrative expenses, could exceed our estimates. Furthermore, we may not receive any future distributions in connection with our non-voting profits interest. If our overall financial performance does not meet our expectations, our business could suffer.
Our capital requirements and our potential need for, and ability to obtain, additional financing are uncertain.
As of December 31, 2020, we had cash and cash equivalents of $21.2 million. GIAPREZA and XERAVA are our approved products and our only sources of product revenue. The amount and timing of future funding requirements, if any, will depend on many factors, including the success of our commercialization efforts for GIAPREZA and XERAVA, and our ability to control expenses. If necessary, we will raise additional capital through equity or debt financings or collaboration agreements. We can provide no assurance that additional financing will be available to us on favorable terms, or at all. If we need to raise additional capital and are unable to do so, we may be forced to curtail or cease our operations.
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Future utilization of net operating loss carryforwards or research and development credit carryforwards may be impaired due to changes in ownership.
Our net operating loss and research and development credit carryforwards may be subject to limitation under Section 382 of the Internal Revenue Code of 1986 (the “IRC”). As a result, our deferred tax assets and related valuation allowance may be reduced for the estimated impact of the net operating loss and research and development credit carryforwards that we estimate may expire unused. Utilization of our remaining net operating loss and research and development credit carryforwards may still be subject to substantial annual limitations due to ownership change limitations provided by the IRC and similar state provisions, including those that may come in conjunction with market trades by our shareholders or future equity financings.
Our ability to hire and retain key employees is uncertain.
The market for effective professionals in the pharmaceutical industry is competitive, and hiring and retaining these professionals is expensive and challenging. If we are unable to hire and retain key employees, we may be unable to effectively execute on our operating plan, and our business could suffer.
Our employees may engage in misconduct, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.
We are exposed to the risk of employee misconduct, which could include intentional failures to comply with regulatory standards and requirements, such as FDA regulations, federal and state healthcare fraud and abuse laws and regulations, or similar laws and regulations established and enforced by comparable foreign regulatory authorities. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commissions, customer incentive programs and other business arrangements. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in protecting us from governmental actions or lawsuits. If any such actions are instituted against us, and we are not successful in defending ourselves, those actions, including the imposition of significant fines or other sanctions, could have a material adverse effect on our business and results of operations.
Failure to obtain regulatory approval in international jurisdictions would prevent our products, our product candidates or any other products the Company or its current or future out-licensees may develop from being marketed abroad.
In the event the Company or its current or future out-licensees pursue the right to market and sell our products, our product candidates or any other products we may develop in jurisdictions other than the U.S. or the European Union, the Company or its current or future out-licensees would be required to obtain separate marketing approvals and comply with numerous and varying regulatory requirements in each country or jurisdiction. The approval procedures vary among countries and may involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA or European Commission (“EC”) approval. The regulatory approval process outside the U.S. generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the U.S., it is required that the product be approved for reimbursement before the product can be approved for sale in that country or jurisdiction. In the event the Company or its current or future out-licensees choose to pursue them, the Company or its current or future out-licensees may not obtain approvals from regulatory authorities in such countries on a timely basis, if at all. Approval by the FDA or EC does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the U.S. does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. If the Company or its current or future out-licensees are unable in the future to obtain approval of a product or product candidate by regulatory authorities other countries or jurisdictions, the commercial prospects of that product or product candidate may be significantly diminished and our business could suffer.
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We may not be successful in our efforts to out-license our product candidates.
Although a substantial amount of our effort will focus on the commercialization of GIAPREZA and XERAVA, we also may seek to out-license our product candidates. We cannot assure you that our efforts to out-license our product candidates will be successful.
RISKS RELATED TO INTELLECTUAL PROPERTY
GIAPREZA’s and XERAVA’s market exclusivity periods will depend on the validity and enforceability of issued and pending patents covering GIAPREZA and XERAVA.
We depend on patents and other intellectual property rights to prevent others from improperly benefiting from our commercial products, GIAPREZA and XERAVA, and products or inventions that we develop or acquire. For details about our intellectual property portfolio protecting GIAPREZA and XERAVA, see the section titled “Business—Intellectual Property.”
We plan to file additional patent applications that, if issued, would provide further protection for GIAPREZA and XERAVA. Although we believe the bases for these patents and patent applications are sound, they are untested, and there is no assurance that they will not be successfully challenged. There can be no assurance that any patent previously issued will protect GIAPREZA or XERAVA from generic competition or that any patent application will result in an issued patent that will protect GIAPREZA or XERAVA from generic competition. Furthermore, there can be no assurance that GIAPREZA or XERAVA will not be held to infringe valid patents held by others. If our owned and in-licensed intellectual property do not protect GIAPREZA or XERAVA from generic competition, GIAPREZA or XERAVA sales will decline, and our business will suffer. If either GIAPREZA or XERAVA is held to infringe valid patents held by others, we could be subject to liability, and our business could suffer.
If we fail to comply with our obligations under our in-license agreements, we may lose rights to critical patents that are important to the commercialization and net sales potential of GIAPREZA and XERAVA.
We have licensed patent rights covering GIAPREZA from George Washington University (“GW”) and licensed patent rights covering XERAVA from Harvard University (“Harvard”) and Paratek Pharmaceuticals, Inc. (“Paratek”). If, for any reason, our in-license agreements with GW, Harvard or Paratek are terminated or we otherwise lose those rights, it would materially and adversely affect our business. Our in-license agreements with GW, Harvard and Paratek impose, and any future collaboration agreements or license agreements we enter into are likely to impose, various development, commercialization, commercial supply, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement or other obligations on us. Failure to fulfill these obligations would pose a material risk to our patent protection and commercial prospects for GIAPREZA and XERAVA, and our business would suffer.
If our products or our product candidates infringe the rights of others, we could be subject to expensive litigation, become liable for substantial damages, be required to obtain licenses from others or be prohibited from selling our products or product candidates altogether.
Our competitors or others may have patent rights that they choose to assert against us or our licensors, licensees, suppliers, customers or potential marketing partners. Moreover, we may not know about patents or patent applications that our products or product candidates would infringe. Because patent applications do not publish for at least 18 months, if at all, and can take many years to issue, there may be currently pending applications unknown to us that may later result in issued patents that our products or product candidates would infringe. In addition, if third parties file patent applications or obtain patents claiming inventions also claimed by us or our licensors in issued patents or pending applications, we may have to participate in interference proceedings in the U.S. Patent and Trademark Office (“USPTO”) to determine priority of invention. If third parties file oppositions in foreign countries, we may
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also have to participate in opposition proceedings in foreign tribunals to defend the patentability of claims in our foreign patent applications.
If a third party claims that we infringe its proprietary rights, any of the following may occur:
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we may become involved in time-consuming and expensive litigation, even if the claim is without merit;
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we may become liable for substantial damages for past infringement if a court decides that we have infringed a competitor’s patent;
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a court may prohibit us from selling or licensing our products without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross-licenses to our patents; or
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we may have to redesign our products or product candidates so that they do not infringe patent rights of others, which may not be possible or commercially feasible and may require new regulatory approvals.
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Any of these events would have a material adverse effect on our business, results of operations and financial condition.
Patent policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
Changes in either the patent laws or interpretation of the patent laws in the U.S. or other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we or our licensors were the first to make the inventions claimed in our owned and licensed patents or pending applications, or that we or our licensor were the first to file for patent protection of such inventions.
Assuming the other requirements for patentability are met, in the U.S., prior to March 15, 2013, the first to make the claimed invention is entitled to the patent, while, outside the U.S., the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith America Invents Act (“Leahy-Smith Act”), enacted on September 16, 2011, the U.S. has moved to a first-to-file system. The Leahy-Smith Act also includes a number of significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation. In general, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations and financial condition.
Among some of the other changes introduced by the Leahy-Smith Act are changes that limit where a patentee may file a patent infringement suit and provide new opportunities for third parties to challenge issued patents in the USPTO. We may be subject to the risk of third-party prior art submissions on pending applications or become a party to opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patents for our products or product candidates. There is a lower standard of evidence necessary to invalidate a patent claim in a USPTO proceeding relative to the standard in U.S. federal courts. This could lead third parties to challenge and successfully invalidate our patents that would not otherwise be invalidated if challenged through the court system.
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RISKS RELATED TO OUR INDUSTRY
We are subject to various federal, state and foreign laws and regulations governing the health care industry that could result in substantial penalties for noncompliance.
We are subject to various federal, state and foreign laws and regulations governing the health care industry that could result in substantial penalties for noncompliance. These laws and regulations may impact our ability to operate, including our sales and marketing efforts. In addition, we may be subject to patient privacy regulation by federal, state and foreign governments that govern jurisdictions in which we conduct our business. The laws and regulations that may affect our ability to operate include:
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The federal Anti-Kickback Statute, which prohibits, among other things, persons from soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, an item or service reimbursable under a federal health care program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value, including for example gifts, cash payments, donations, the furnishing of supplies or equipment, waivers of payment, ownership interests, and providing any item, service or compensation for something other than fair market value.
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Federal false claims and civil monetary penalties laws, including the federal civil False Claims Act, which prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent. Although we may not submit claims directly to payors, manufacturers can be held liable under these laws in a variety of ways. These include: providing inaccurate billing or coding information to customers; improperly promoting a product’s off-label use; violating the federal Anti-Kickback Statute; or misreporting pricing information to government programs.
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Federal false claims and civil monetary penalties laws, including the federal civil False Claims Act, which prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent. Although we may not submit claims directly to payors, manufacturers can be held liable under these laws in a variety of ways. These include: providing inaccurate billing or coding information to customers; improperly promoting a product’s off-label use; violating the federal Anti-Kickback Statute; or misreporting pricing information to government programs.
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Provisions of the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit, among other things, knowingly and willfully executing a scheme to defraud any health care benefit program or making false statements in connection with the delivery of or payment for health care benefits, items or services.
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The federal Physician Payment Sunshine Act requirements, under the Patient Protection and Affordable Care Act (“PPACA”), which require manufacturers of certain drugs and biologics to track and report to U.S. Centers for Medicare & Medicaid Services (“CMS”) payments and other transfers of value they make to U.S. physicians and teaching hospitals as well as physician ownership and investment interests in the manufacturer.
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Various federal, state and foreign data privacy and security laws and regulations. These include provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations (“HITECH”), which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information in the U.S. and the General Data Protection Regulation (“GDPR”) in the European Union that became effective in May 2018. We may not be directly subject to certain of these laws and regulations, such as privacy and security requirements under HIPAA; however, we may be subject to criminal penalties for knowingly, aiding and embedding these violations.
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Section 1927 of the Social Security Act, which requires that manufacturers of drugs and biological products covered by Medicaid report pricing information to CMS on a monthly and quarterly basis, including the best price available to any customer of the manufacturer, with certain exceptions for government programs, and pay prescription rebates to state Medicaid programs based on a statutory formula derived from reported pricing information.
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State and/or foreign law equivalents of each of the above federal laws, such as the recently effective California Consumer Privacy Act, many of which differ from each other in significant ways and may not have the same effect, which complicates our compliance efforts.
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If we are found to be in violation of any of the laws or regulations described above or any other laws or regulations that apply to us, we may be subject to substantial penalties, including civil and criminal penalties, damages, fines and possible exclusion from participation in Medicare, Medicaid and other federal health care programs. If we are subjected to substantial penalties, our business will suffer, and we may be forced to curtail or cease our operations.
Drugs approved by the FDA, EC and/or other regulatory agencies are subject to ongoing regulation.
Any products manufactured or distributed by us pursuant to FDA, EC and/or other regulatory agency approvals may be subject to continuing regulation by such agencies, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA, EC and/or other regulatory agencies and may be subject to periodic unannounced inspections by such agencies for compliance with cGMPs, which impose certain procedural and documentation requirements on us and our third-party manufacturers. Even after regulatory approval is obtained, under certain circumstances, such as later discovery of previously unknown safety risks, the FDA, EC and/or other regulatory agencies can withdraw approval, recall the product or subject the drug to additional restrictions. In addition, governments outside of the U.S. tend to impose strict price controls, which may adversely effect our revenues or our royalty payments received from license agreements.
Drug development involves a lengthy and expensive process with an uncertain outcome.
Drug development involves a lengthy and expensive process with an uncertain outcome. Failure may occur at any time during drug development. The results of nonclinical studies and early clinical studies may not be predictive of the results of later-stage clinical studies. For example, the safety or efficacy results of clinical studies do not ensure that later clinical studies will demonstrate similar results. Even if clinical studies demonstrate the safety and efficacy of the product candidate, there is no assurance that such product candidate will receive regulatory approval.
Business interruptions resulting from geopolitical actions, natural disasters, public health crises or other catastrophic events could have an adverse impact on our business.
Business interruptions resulting from geopolitical actions, such as war and terrorism, natural disasters, public health crises, such as a pandemic, or other catastrophic events could have an adverse impact on our business. For example, if one of these events were to adversely affect one of our contract manufacturers, our supply of GIAPREZA and XERAVA could be interrupted. Furthermore, in the case of a pandemic, the ability of our critical care specialists to access hospitals and call on physicians may be curtailed, which may adversely affect product sales.
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The ongoing COVID-19 pandemic may disrupt our operations and affect our ability to sell GIAPREZA and XERAVA.
We are unable to accurately predict the full impact that the ongoing Coronavirus Disease 2019 (“COVID‑19”) pandemic will have on our results from operations, financial condition and our ability to sell GIAPREZA and XERAVA due to numerous factors that are not within our control, including its duration and severity of the outbreak. Stay-at-home orders, business closures, travel restrictions, supply chain disruptions and employee illness or quarantines could result in disruptions to our operations, which could adversely impact our results from operations and financial condition. In addition, the COVID-19 pandemic has resulted in ongoing volatility in financial markets. If our access to capital is restricted or associated borrowing costs increase as a result of developments in financial markets relating to the COVID-19 pandemic, our operations and financial condition could be adversely impacted.
RISKS RELATED TO OWNERSHIP OF SHARES OF OUR COMMON STOCK
The price per share of our common stock may fluctuate significantly, and you may lose all or part of your investment.
The price per share of our common stock may fluctuate significantly, and you may lose all or part of your investment. These fluctuations could be based on various factors, including factors described elsewhere in this Annual Report on Form 10-K and below:
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changes in analyst estimates, ratings and price targets;
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negative press reports or other negative publicity, whether or not true, about our business;
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developments concerning the pharmaceutical and biotechnology industry in general;
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market sentiment towards pharmaceutical and biotechnology stocks;
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developments concerning the overall economy; and
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market sentiment toward equity securities.
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Any of these factors may result in large and sudden changes in the volume and trading price of shares of our common stock. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of management, result in negative press reports and, if adversely determined, have a material adverse effect on our results of operations and financial condition.
We have never paid a dividend on shares of our common stock, and you should rely on price appreciation of shares of our common stock for return on your investment.
We have never paid a dividend on shares of our common stock. Even if we decide to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations, financial condition, contractual restrictions and other factors. You should not rely on dividend income from shares of our common stock and should rely on price appreciation of shares of our common stock for a return, if any, on your investment.
Conversion of our convertible preferred stock would result in substantial dilution for our existing shareholders of common stock.
As of December 31, 2020, there were approximately 27.4 million shares of common stock outstanding. We may be required to issue up to approximately 6.7 million additional shares of common stock upon conversion of existing convertible preferred stock. The issuance of these additional shares would represent approximately 20% dilution to our existing shareholders of common stock.
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If we need to obtain additional financing in the future, such financing could result in dilution to your investment, adversely affect the price per share of our common stock and/or create future operating and financial restrictions.
As of December 31, 2020, we had cash and cash equivalents of $21.2 million. GIAPREZA and XERAVA are our approved products and our only source of product revenue. The amount and timing of future funding requirements, if any, will depend on many factors, including the success of our commercialization efforts for GIAPREZA and XERAVA and our ability to control expenses. If necessary, we will raise additional capital through equity or debt financings. We can provide no assurance that additional financing will be available to us on favorable terms, or at all. If we issue additional equity securities or securities convertible into equity securities, you will suffer dilution to your investment, and such issuance may adversely affect the price per share of our common stock. Any new debt financing we enter into may involve covenants that restrict our operations, which may include limitations on borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens or pay dividends.
Our directors, executive officers and principal shareholders have substantial control over the Company, which could limit your ability to influence the outcome of key transactions, including a change of control.
As of February 25, 2021, our current directors, officers and shareholders who own greater than 5% of our outstanding shares of common stock, together with their affiliates, beneficially own, in the aggregate, approximately 55% of our outstanding shares of common stock. As a result, these current directors, officers and shareholders, if they act, will be able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. In addition, our current directors, officers and shareholders, acting together, would have the ability to control the management and affairs of the Company. They may also have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of the Company, could deprive our shareholders of an opportunity to receive a premium for their shares of common stock as part of a sale of the Company and could affect the market price of shares of our common stock.
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GENERAL RISK FACTORS
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
Disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Our business and operations may be materially adversely affected in the event of computer system failures or security breaches.
Despite the implementation of security measures, our internal computer systems, and those of other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, fire, terrorism, war and telecommunication and electrical failures. If such an event were to occur and interrupt our operations, it could result in a material disruption of our development programs. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, loss of trade secrets or inappropriate disclosure of confidential or proprietary information, including protected health information or personal data of employees or former employees, access to our customer or clinical data or disruption of the manufacturing process, we could incur liability and the further development of our products or product candidates could be delayed. We may also be vulnerable to cyber-attacks or other malfeasance by hackers, employees and others. This type of breach of our cybersecurity may compromise our confidential information or our financial information and adversely affect our business or result in legal proceedings.
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